Algorhythm Holdings, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Our management, under the supervision and with the participation of our Principal Executive Officer (our Chief Executive Officer) and Principal Financial Officer (our Chief Financial Officer), has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023, the end of our fiscal year covered by this report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2023, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures are effective. (b) Management’s Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. This rule defines internal control over financial reporting as a process designed by, or under the supervision of Company management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Management has assessed the effectiveness of our internal control over financial reporting using the components established in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A material weakness is any deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of the year covered by this Annual Report. (c) Changes in Internal Controls There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2023, that materially affected, or were reasonably likely to materially affect the Company’s internal control over financial reporting. Auditor Attestation This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 26 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following table sets forth certain information with respect to our executive officers, directors and significant employees as of the date of this filing. Milton C. Ault, III 53 Executive Chairman Gary Atkinson 41 Chief Executive Officer, Director Bernardo Melo 46 Chief Revenue Officer, Director Lionel Marquis 70 Chief Financial Officer James M.Turner 47 General Counsel, Director Henry C.W. Nisser 54 Director Kenneth S. Cragun 61 Director Harvey Judkowitz 78 Director Joseph Kling 93 Director Mathieu Peloquin 52 Director Jay B. Foreman 61 Director The following information sets forth the backgrounds and business experience of our directors and executive officers: Milton C. Ault, III, was appointed to the Board of Directors as Executive Chairman in April 2023. Mr. Ault has served as Executive Chairman of the Board of Directors of Ault Alliance since January 2021. Mr. Ault previously served as Chief Executive Officer of Ault Alliance from December 2017 to January 2021 and as Executive Chairman from March to December 2017. Mr. Ault is a seasoned business professional and entrepreneur who has spent decades identifying value in various financial markets including equities, fixed income, commodities, and real estate. Mr. Ault has served as the Chairman of the Board of Ault Disruptive Technologies Corporation (“ADTC”), an NYSE listed Special Purpose Acquisition Company, since its incorporation in February 2021. On February 25, 2016, Mr. Ault founded Alzamend Neuro, Inc. (“Alzamend”), a biotechnology firm dedicated to finding the treatment, prevention and cure for Alzheimer’s Disease and served as its Chairman until its initial public offering, when he became Alzamend’s Chairman Emeritus and a consultant. Mr. Ault has served as Chairman and Chief Executive Officer of Ault & Company, Inc., a Delaware holding company, since December 2015, and as Chairman of Avalanche International Corp. (“Avalanche”), a publicly traded Nevada company, which as such is not required to file periodic reports, since September 2014. Since January 2011, Mr. Ault has been the Vice President of Business Development for MCKEA Holdings, LLC, a family office. Throughout his career, Mr. Ault has consulted for publicly traded and privately held companies, providing each of them the benefit of his diversified experience, that range from development stage to seasoned businesses. The Board has concluded that Mr. Ault is qualified to serve on the Board and as Executive Chairman because of his significant business background. Gary Atkinson joined the Company in January 2008 and served as General Counsel and Corporate Secretary. In November 2009, Mr. Atkinson was appointed as Interim Chief Executive Officer and was promoted as the Company’s permanent Chief Executive Officer in May, 2012. Mr. Atkinson was appointed as a Director of the Company on August 11, 2022. Mr. Atkinson is a licensed attorney in Florida and Georgia. He graduated from the University of Rochester with a Bachelor’s Degree in Economics and has been awarded a dual-degree J.D./M.B.A. from Case Western Reserve University School of Law and Weatherhead School of Management. The Company believes that Mr. Atkinson is qualified to serve on the Board of Directors because of his 15+ years of karaoke industry experience and management experience. Bernardo Melo has been with the Company since February 2003. Mr. Melo was appointed as Chief Revenue Officer on April 22, 2022 and has served as the Vice President of Global Sales and Marketing (“VP of Sales”) since 2008. Mr. Melo was appointed as a Director of the Company on July 27, 2022. During his tenure at the Company, Mr. Melo has overseen the sales and operations of the music division as well as managed the customer service department. Before taking over the responsibility of VP of Sales, Mr. Melo held dual roles with the Company managing the operations, licensing and sales of the music division while concentrating on hardware sales for the Latin America and Canada market as well as key U.S. accounts such as Walmart. Prior to joining the Company, Mr. Melo held a consulting role for Rewards Network formerly Idine. Mr. Melo’s assignment during his tenure was improving their operational procedures while increasing efficiencies and lowering operating cost. Mr. Melo also worked at Coverall North America as Director of Sales managing a startup initiative for the company covering 15 regional office and 40 sales reps across North America focusing on franchise sales. Overall Mr. Melo has over 16 years of sales, marketing and management experience. The Company believes that Mr. Melo is qualified to serve on the Board of Directors because of his 16+ years in senior positions sales and marketing experience as well as his karaoke industry and management experience. 27 Lionel Marquis joined the Company in June 2008 as Controller and Principal Accounting Officer and was appointed as the Company’s Chief Financial Officer in May 2012. For the past 27 years Mr. Marquis has served as Controller and or Chief Financial Officer for several manufacturing and distribution companies in the South Florida area. Some of these companies include Computer Products, Inc (Artesyn Technologies Inc), US Plastic Lumber Corp., Casi-Rusco, (division of Interlogix Inc.), DHF Industries, Inc and Ingear Fashions, Inc. Mr. Marquis graduated from Bryant University with a Bachelor’s Degree in Business Administration with a major in accounting. Mr. Marquis is a Certified Public Accountant in the state of Florida. Henry C.W. Nisser was appointed as director of the Company On April 5, 2023. Mr. Nisser has served as President of Ault Alliance, Inc. (“AAI)” since January 2021, as a member of the Board of Directors of Ault Alliance since September 2020 and as General Counsel of Ault Alliance since May 2019. Mr. Nisser previously served as Executive Vice President of Ault Alliance from May 2019 to January 2021. Mr. Nisser has served as the President, General Counsel and on the Board of Directors of BitNile Metaverse, Inc., a Nasdaq listed company that operates the BitNile.com metaverse platform, since March 2023. Mr. Nisser is the Executive Vice President and General Counsel of Avalanche. Mr. Nisser has served as the President, General Counsel and on the board of directors of ADTC since its incorporation in February 2021. Mr. Nisser has served on the board of directors of Alzamend since September 1, 2020 and has served as its Executive Vice President and General Counsel since May 1, 2019. From October 31, 2011 through April 26, 2019, Mr. Nisser was an associate and subsequently a partner with Sichenzia Ross Ference LLP (“SRF”), a law firm based in New York City. While with SRF, his practice was concentrated in national and international corporate law, with a particular focus on U.S. securities compliance, public as well as private M&A, equity and debt financings and corporate governance. Mr. Nisser drafted and negotiated a variety of agreements related to reorganizations, share and asset purchases, indentures, public and private offerings, tender offers and going private transactions. Mr. Nisser also represented clients’ special committees established to evaluate M&A transactions and advised such committees’ members with respect to their fiduciary duties. Mr. Nisser is fluent in French and Swedish as well as conversant in Italian. Mr. Nisser received his B.A. from Connecticut College in 1992, where he majored in International Relations and Economics. He received his LLB from the University of Buckingham School of Law in 1999. The Board has concluded that Mr. Nisser is qualified to serve on the board of directors because of his extensive legal experience involving complex transactions and comprehensive knowledge of securities laws and corporate governance requirements applicable to listed companies. Kenneth S. Cragun was appointed as a director of the Company on July 27, 2022. Mr. Cragun has served as the Chief Financial Officer AAI since August 2020, and from October 2018 until August 2020, served as the Chief Accounting Officer of AAI. Since June 2021, Mr. Cragun has served on a part-time basis as the Senior Vice President of Financial of Alzamend, and between December 2018 and June 2021, he served as Chief Financial Officer. He served as a CFO Partner at Hardesty, LLC, a national executive services firm since October 2016. His assignments at Hardesty included serving as CFO of CorVel Corporation, a $1.1 billion market cap publicly traded company (NASDAQ: CRVL) and a nationwide leader in technology driven, healthcare-related, risk management programs and of RISA Tech, Inc. a private structural design and optimization software company. Mr. Cragun was also CFO of two NASDAQ-listed companies, Local Corporation, from April 2009 to September 2016, which operated Local.com, a U.S. top 100 website, and Modtech Holdings, Inc., from June 2006 to March 2009, a supplier of modular buildings. Prior thereto, he had financial leadership roles with increasing responsibilities at MIVA, Inc., ImproveNet, Inc., NetCharge Inc., C-Cube Microsystems, Inc, and 3-Com Corporation. Mr. Cragun has served on the board of directors and is the chairman of the audit committee of Verb Technology Company, Inc., a Nasdaq listed software-as-a-service applications platform developer, since September 2018. Mr. Cragun began his professional career at Deloitte. Mr. Cragun holds a Bachelor of Science degree in accounting from Colorado State University-Pueblo. Mr. Cragun’s industry experience is vast, with extensive experience in fast-growth environments and building teams in more than 20 countries. Mr. Cragun has led multiple financing transactions, including IPOs, PIPEs, convertible debt, term loans and lines of credit. The Board has concluded that Mr. Cragun is qualified to serve on the Board of Directors because of his experience with multiple financing transactions including IPO’s, PIPEs, convertible debt and lines of credit. James M. Turner was appointed as a director of the Company on July 27, 2022 and as General Counsel, on a part-time basis, in April 2023. Mr. Turner has served as the Deputy General Counsel and VP of Legal Affairs at Ault Alliance, Alzamend and Avalanche since April 2021. Prior to joining AAI, Mr. Turner spent approximately 19 years, including the last 10 as a partner, at SRF. Mr. Turner has significant practice involving corporate and securities law, including public and private equity and debt offerings, mergers and acquisitions, corporate governance and securities law compliance. Mr. Turner received B.A. degrees from Elmira College in political science and international relations, and his J.D. degree from American University, Washington College of Law, where he was a member of the American University International Law Review. The Board has concluded that Mr. Turner is qualified to serve on the board of directors because of his extensive legal experience involving complex transactions and comprehensive knowledge of securities laws and corporate governance requirements applicable to listed companies. Harvey Judkowitz has served as a Director of the Company since March 29, 2004 and is the chairman of the Audit Committee. He is licensed as a CPA in New York and Florida. From 1988 to the present date, Mr. Judkowitz has conducted his own CPA practices. He has served as the Chairman and CEO of UniPro Financial Services, a diversified financial services company up until the company was sold in September of 2005. He was formerly the President and Chief Operating Officer of Photovoltaic Solar Cells, Inc. The Company believes that Mr. Judkowitz is qualified to serve on the Board of Directors because he is a qualified CPA with over 19+ years’ experience on the Board. 28 Joseph Kling was appointed as a Director of the Company on May 9, 2017. Mr. Kling has spent his entire career in the toy industry, most notably serving as CEO of View-Master, the iconic stereoscopic toy company, which later purchased Ideal Toy from CBS and later became View-Master Ideal, publicly traded on the Nasdaq. View-Master Ideal later acquired California Plush Toys and the entire group was later acquired by Tyco Toys in 1989. Mr. Kling later went into private M&A consulting and sat on the board of Russ Berrie & Co (currently known as Kids Brands, Inc.) for 21 years advising on the acquisition of several toy companies. Mr. Kling has also served on the Board of Crown Crafts, a large distributor of infant, toddler, and juvenile consumer products and on the board of Lancit Media Entertainment, a children’s and family media production company (formerly listed on the Nasdaq). Notably, Mr. Kling has been involved in many major toy company acquisitions of brands such as Melissa & Doug and Brio. The Company believes that Mr. Kling is qualified to serve on the Board of Directors because of his success and relationships in the toy industry and his deep understanding of consumer products and market awareness of mergers and acquisitions in the toy industry. Mathieu Peloquin was appointed as a Director of the Company on December 1, 2021. Mr. Peloquin was appointed Senior Vice-President, Marketing and Communications at Stingray in 2013 and oversees marketing, communication strategies, content and investor relations. Mr. Peloquin brings more than 20 years of experience as an expert marketer, strategist and inspiring leader. Prior to joining Stingray, Mr. Peloquin was Vice President of Marketing at Transcontinental Media Inc. and Vice President of Transcontinental Media Inc.’s Digital Marketing Solutions Group from 2010 to 2013. He also held several executive positions at Reader’s Digest Magazines Canada Limited and co-founded Equinox Marketing Services. Mr. Peloquin is a CPA, CMA and holds a Bachelor of Commerce from the School of Management of the Université du Québec à Montréal. The Company believes that Mr. Peloquin is qualified to serve as a member of the Board of Directors due to his extensive business experience. Jay B. Foreman was appointed as Director of the Company on May 23, 2022. Mr. Foreman has been a veteran of the toy industry for over 30 years. Mr. Foreman started his career at Fable Toys as a territory sales rep for the Jersey Shore and within ten years became SVP for Galoob Toys, where he was primarily responsible for developing the direct import business. He has founded multiple toy companies over his career, including co-founding Play-By-Play Toy’s and Novelties and more recently Play Along Toys, a leading toy company, which was subsequently sold to Jakks Pacific in 2004. Mr. Foreman later went on to found his third start up which became Basic Fun!, now the makers of Tonka™ trucks, Carebears™, K’NEX™, Lincoln Logs™, Playhut™. Mr. Foreman serves as CEO of Basic Fun!, which role he has had since he founded the company in 2009. He has also served on the boards of directors of the Toy Association and Licensing Merchandisers association. He currently chairs the Toy Industry trade show committee which is responsible for the world famous NY Toy Fair. The Company believes that Mr. Foreman is qualified to serve as a member of the Board of Directors because of his extensive history and experience in the toy business, including his deep knowledge of licensing, operations, sales and marketing, M&A, and capital markets. Nomination Of Directors Our Nominating Committee is responsible for identifying individuals qualified to become directors. The Nominating Committee seeks to identify director candidates based on input provided by a number of sources, including (1) the Nominating Committee members, (2) our other directors, (3) our stockholders, (4) our Chief Executive Officer or Chairman, and (5) third parties such as professional search firms. In evaluating potential candidates for director, the Nominating Committee considers the entirety of each candidate’s credentials. Qualifications for consideration as a director nominee may vary according to the particular areas of expertise being sought as a complement to the existing composition of the Board of Directors. However, at a minimum, candidates for director must possess: ● high personal and professional ethics and integrity; ● the ability to exercise sound judgment; ● the ability to make independent analytical inquiries; ● a willingness and ability to devote adequate time and resources to diligently perform Board and committee duties; and ● the appropriate and relevant business experience and acumen. In addition to these minimum qualifications, the Nominating Committee also takes into account when considering whether to nominate a potential director candidate the following factors: ● whether the person possesses specific industry expertise and familiarity with general issues affecting our business; ● whether the person’s nomination and election would enable the Board to have a member that qualifies as an “audit committee financial expert” as such term is defined by the Securities and Exchange Commission (the “SEC”) in Item 401 of Regulation S-K; ● whether the person would qualify as an “independent director”, as such term is defined in the Nasdaq Stock Market Rules; ● the importance of continuity of the existing composition of the Board of Directors to provide long term stability and experienced oversight; and ● the importance of diversified Board membership, in terms of both the individuals involved and their various experiences and areas of expertise. 29 Committees of the Board of Directors Audit Committee The members of our Audit Committee are Messrs. Judkowitz, Kling and Foreman, with Mr. Judkowitz serving as the Chairperson. Each of Messrs. Judkowitz, Kling and Foreman is independent under the rules and regulations of the SEC and the listing standards of the Nasdaq Stock Market applicable to audit committee members. Our board of directors has determined that Mr. Judkowitz qualifies as an audit committee financial expert within the meaning of SEC regulations and meet the financial sophistication requirements of the Nasdaq Stock Market. Our Audit Committee has the responsibility for, among other things, (i) selecting, retaining and overseeing our independent registered public accounting firm, (ii) obtaining and reviewing a report by independent auditors that describe the accounting firm’s internal quality control, and any materials issues or relationships that may impact the auditors, (iii) reviewing and discussing with the independent auditors standards and responsibilities, strategy, scope and timing of audits, any significant risks, and results, (iv) ensuring the integrity of the Company’s financial statements, (v) reviewing and discussing with the Company’s independent auditors any other matters required to be discussed by PCAOB Auditing Standard No. 1301, (vi) reviewing, approving and overseeing any transaction between the Company and any related person and any other potential conflict of interest situations, (vii) overseeing the Company’s internal audit department, (v) reviewing, approving and overseeing related party transactions, and (viii) establishing and overseeing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by Company employees of concerns regarding questionable accounting or auditing matters. The Audit Committee charter can be found online at https://singingmachine.com/pages/governance. Compensation Committee The members of our Compensation Committee are Messrs. Judkowitz, Kling and Foreman, with Mr. Kling serving as the Chairperson. Our Compensation Committee has the responsibility for, among other things, (i) reviewing and approving the chief executive officer’s compensation based on an evaluation in light of corporate goals and objectives, (ii) reviewing and recommending to the Board the compensation of all other executive officers, (iii) reviewing and recommending to the Board incentive compensation plans and equity plans, (iv) reviewing and discussing with management the Company’s Compensation Discussion and Analysis and related information to be included in the annual report on Form 10-K and proxy statements, and (v) reviewing and recommending to the Board for approval procedures relating to Say on Pay Votes. The Compensation Committee charter can be found online at https://singingmachine.com/pages/governance. Nominating and Corporate Governance Committee The members of our Nominating and Corporate Governance Committee are Messrs. Judkowitz, Kling and Foreman, with Mr. Foreman serving as the Chairperson. Our Nominating and Corporate Governance Committee has the responsibility relating to assisting the Board in, among other things, (i) identifying and screening individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors, (ii) recommending to the Board the approval of nominees for director, (ii) developing and recommending to our board of directors a set of corporate governance guidelines, and (iv) overseeing the evaluation of our board of director. The Nominating and Corporate Governance Committee charter can be found online at https://singingmachine.com/pages/governance. No Family Relationships There is no family relationship between any director and executive officer or among any directors or executive officers. Board Diversity The Board does not have a formal policy regarding board diversity for our board of directors as a whole nor for each individual member, the nominating and corporate governance committee does consider such factors as gender, race, ethnicity, experience and area of expertise, as well as other individual attributes that contribute to the total diversity of viewpoints and experience represented on the board of directors. 30 As required by the Nasdaq Rules that were approved by the SEC in August 2021, the Company is providing information about the gender and demographic diversity of its directors in the format required by Nasdaq Rules. The information in the matrix below is based solely on information provided by our directors about their gender and demographic self-identification. Directors who did not answer or indicated that they preferred not to answer a question are shown under “did not disclose demographic background” or “did not disclose gender” below. Board Diversity Matrix (as of July 6, 2023) Total Number of Directors 10 Female Male Non-Binary Did Not Disclose Gender Part I: Gender Identity Directors 10 Part II: Demographic Background African American or Black Alaskan Native or Native American Asian Hispanic or Latinx 1 Native Hawaiian or Pacific Islander White 8 Two or More Races or Ethnicities 1 LGBTQ+ Did Not Disclose Demographic Background Involvement in Certain Legal Proceedings Except as set forth below, our directors and executive officers have not been involved in any of the following events during the past ten years: 1. any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; 2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); 3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; 4. being found by a court of competent jurisdiction in a civil action, the SEC or the CFTC to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; 5. being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or 6. being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. On June 23, 2015, Local Corporation, a Delaware corporation, filed a voluntary petition for reorganization under Chapter 11 of the US Bankruptcy Code. Mr. Cragun, a Director of the Company, was chief financial officer of Local Corporation at the time of filing. Code of Ethics We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer. Our Code of Ethics is available on our website at https://singingmachine.com/pages/governance . COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires our officers and directors, and persons who beneficially own more than 10% of the outstanding shares of our common stock, to file reports of ownership and changes in ownership concerning their shares of our common stock with the SEC and to furnish us with copies of all Section 16(a) forms they file. We are required to disclose delinquent filings of reports by such persons. Based solely upon a review of Forms 3, Forms 4, and Forms 5 furnished to us pursuant to Rule 16a-3 under the Exchange Act, we believe that all such forms required to be filed pursuant to Section 16(a) of the Exchange Act during the year ended March 31, 2023 were timely filed, as necessary, by the officers, directors, and security holders required to file such forms except for as set forth in the Delinquent Section 16(a) section below. 31 Delinquent Section 16(a) Reports ● Mr. Gary Atkinson filed a late Form 4 on June 23, 2022 with respect to one transaction; ● Mr. Bernardo Melo filed a late Form 4 on June 23, 2022 with respect to one transaction; ● Mr. Lionel Marquis filed a late Form 4 on June 23, 2022 with respect to one transaction; and ● Mr. Jay B. Foreman filed a late Form 4 on June 30, 2022 with respect to one transaction. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table provides information regarding the compensation earned by or paid to our named executive officers with respect to the years ended March 31, 2023 and 2022. Name and Principal Position Year Salary Bonus Stock Awards Option Awards Non-Equity Incentive Plan Comp Non-Qualified Deferred Compensation Earnings Other Comp TOTAL COMP Gary Atkinson 2023 $ 212,673 $ 30,000 $ 15,620 $ 42,966 $ - $ - $ 6,192 $ 307,451 Chief Executive Officer 2022 $ 156,075 $ - $ - $ - $ - $ - $ 5,339 $ 161,414 Lionel Marquis 2023 $ 181,694 $ 240,000 $ 8,096 $ 30,323 $ - $ - $ 8,111 $ 468,224 Chief Financial Officer 2022 $ 154,154 $ - $ - $ - $ - $ - $ 6,484 $ 160,638 Bernardo Melo 2023 $ 213,019 $ 98,166 $ 8,096 $ 30,323 $ - $ - $ 12,447 $ 362,051 Chief Revenue Officer 2022 $ 163,004 $ 146,725 $ - $ 9,114 $ - $ - $ 12,389 $ 331,232 (1) Mr. Atkinson earned an annual salary of $215,000 for the fiscal year ended 2023 and $156,075 for the fiscal year ended March 31, 2022. (2) Mr. Marquis earned an annual salary of $210,000 for the fiscal year ended 2023 and $154,514 for the fiscal year ended March 31, 2022. (3) Mr. Melo earned an annual salary of $215,000 for the fiscal year ended 2023 and $163,004 for the fiscal year ended March 31, 2022. (4) Other compensation consisted of our 401(k) match benefit. Outstanding Option and Stock Awards at Fiscal Year-End The following table sets forth information with respect to outstanding grants of options to purchase our common stock under stock option awards issued with Board of Directors approval to the named executive officers as of the fiscal year ended March 31, 2023: Name and Principal Position Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) Gary Atkinson, CEO - Other stock option awards 5,000 - N/A 6.30 07/01/2023 N/A N/A N/A N/A - Other stock option awards 1,667 - N/A 7.20 03/31/2026 N/A N/A N/A N/A - Other stock option awards 3,333 - N/A 14.10 05/03/2027 N/A N/A N/A N/A - Other stock option awards 13,334 - N/A 4.00 05/24/2032 N/A N/A N/A N/A - Other stock option awards 1,667 - N/A 8.65 08/16/2032 N/A N/A N/A N/A Lionel Marquis, CFO - Other stock option awards 3,333 - N/A 6.30 07/01/2023 N/A N/A N/A N/A - Other stock option awards 500 - N/A 7.20 03/31/2026 N/A N/A N/A N/A - Other stock option awards 1,667 - N/A 14.10 05/03/2027 N/A N/A N/A N/A - Other stock option awards 10,000 - N/A 4.00 05/24/2032 N/A N/A N/A N/A - Other stock option awards 1,000 - N/A 8.65 08/16/2032 N/A N/A N/A N/A Bernardo Melo, VP Sales - Other stock option awards 8,333 - N/A 6.30 07/01/2023 N/A N/A N/A N/A - Other stock option awards 833 - N/A 5.10 06/30/2025 N/A N/A N/A N/A - Other stock option awards 3,333 - N/A 9.60 08/10/2026 N/A N/A N/A N/A - Other stock option awards 6,667 - N/A 14.10 05/03/2027 N/A N/A N/A N/A - Other stock option awards 1,667 - N/A 6.60 12/25/2031 N/A N/A N/A N/A - Other stock option awards 10,000 - N/A 4.00 05/24/2032 N/A N/A N/A N/A - Other stock option awards 1,000 - N/A 8.65 08/16/2032 N/A N/A N/A N/A Employment Agreements Effective April 22, 2022, we entered into employment agreements with each of our Chief Executive Officer and Chief Revenue Officer (the “Employment Agreements”). Effective December 28, 2022 we entered into an employment agreement with our Chief Financial Officer. The employment agreements for Messrs. Atkinson and Melo are for a term of three years with automatic renewals for successive one-year terms, unless either party provides notice of its intention not to extend. Mr. Marquis’s employment agreement terminates on the close of business on December 31, 2023. 32 Pursuant to the Employment Agreements, as compensation for their service as executives of the Company, the executives will receive: (1) a base salary per annum (the “Base Salary”), set forth below and commensurate benefits, as described in the Employment Agreement; (2) eligibility, subject to their continued employment with the Company, to earn an annual bonus (the “Annual Bonus”); (3) eligibility, also subject to their continued employment with the Company, to participate in the Company’s 2023 Equity Incentive Plan, or any successor plan, subject to the terms of such plan; and (4) entitlement, also subject to the executives’ continued employment with the Company, to reimbursement for all reasonable and necessary out-of-pocket business, entertainment, and travel expenses incurred by them in connection with the performance of their duties for the Company and the Company’s expense reimbursement policies and procedures. The executives’ base salaries are as follows: ● Gary Atkinson: $215,000, with an automatic increase to $225,000 on the first anniversary of the Employment Agreement; provided the Company remains profitable. ● Lionel Marquis: $210,000, terminating on December 31, 2023. ● Bernardo Melo: $215,000 with an automatic increase to $225,000 on the first anniversary of the Employment Agreement; provided the Company remains profitable. In addition to the payment of accrued amounts due to the executives, the Employment Agreements for Messrs. Atkinson and Melo each provide for the payment of severance to the Executives in a lump sum payment equal to two times the sum of the executive’s base salary and annual bonus for the year in which the termination occurs, in the event of the termination of the Agreement by the Company without Cause (as defined in the Employment Agreement), or upon the Company’s election not to renew the Employment Agreement or by the executive for Good Reason (as defined in the Employment Agreement). The Employment Agreements provide for payments to the executive of certain amounts in the event of the executive’s death or disability (as defined in the Employment Agreement). In the event Messrs. Atkinson’s or Melo’s employment is terminated by the executive for Good Reason (as defined in the Employment Agreement) on account of its failure to renew the Employment Agreement or without Cause (as defined in the Employment Agreement”) within twelve months of a Change in Control (as defined in the Employment Agreement), the executive shall be entitled to receive a lump sum payment equal to two times the base salary and annual bonus for the year in which the termination takes place. Payment of severance under the Employment Agreement is conditioned upon Messrs. Atkinson’s and Melo’s execution of a release in favor of the Company. The Employment Agreements superseded the change of control agreements previously entered into by the Company in January 2014 with each of its three executive officers. Pursuant to the change of control agreement (“CIC Agreement”) entered into by the Company in January 2014 and subsequent to the change in control of the Company that occurred in August 2022, Mr. Marquis’ employment agreement included acknowledgement by the Company that he was entitled to receive bonus cash compensation of $400,000. This bonus is to be paid in accordance with the section in his Employment Agreement pertaining to the Change in Control Compensation even if terminated by the Company for any reason. Payments are to be made as follows: (a) $200,000 on December 31, 2022; (b) $100,000 on April 30, 2023; and (c) $100,000 on December 31, 2023. Executive Bonus Plan On April 22, 2022, our Board of Directors approved a Bonus Plan (the “Bonus Plan”) for our executive officers. The Bonus Plan offers a cash bonus, stock options, and stock grants to the executives based on the Company’s EBITDA at its fiscal year end. The value of the cash bonus and number of stock options and grants increases based on the Company’s percentage of net sales. The Bonus Plan also provides for a one-time option grant to the executives upon the successful listing of the Company’s shares of common stock on the Nasdaq Stock Market, LLC. 33 Director Compensation The following table sets forth with respect to the named director, compensation information inclusive of equity awards and payments made during the year ended March 31, 2023. Name Fees Earned or Paid in Cash Stock Awards (1) Option Awards (2) Non-Equity Incentive Plan Compensation ($) Nonqualified Deferred Comepnsation Earnings All Other Compensation Total Harvey Judkowitz $ 18,500 $ 5,000 $ 7,129 $ - $ - $ - $ 30,629 Joseph Kling $ 19,000 $ 5,000 $ 7,129 $ - $ - $ - $ 31,129 Jay Foreman $ 18,000 $ 5,000 $ 8,698 $ - $ - $ - $ 31,698 Mathieu Peloquin $ 12,500 $ 5,000 $ 7,129 $ - $ - $ - $ 24,629 James Turner $ 1,000 $ - $ 4,340 $ - $ - $ - $ 5,340 Kenneth Cragun $ 1,500 $ - $ 4,340 $ - $ - $ - $ 5,840 Refer to Note 1 “Stock Based Compensation” in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report for the relevant assumptions used to determine the valuation of our option awards. (1) As of March 31, 2023 the aggregate number of stock awards held by Messrs. Judkowitz, Kling and Foreman is 12,295 and 1,140, respectively. The aggregate stock awards held by both Messrs. Foreman and Peloquin is 617. (2) As of March 31, 2023 the aggregate number of Company stock options held by Messrs. Judkowitz, Kling and Foreman is 5,669, 4,335, and 1,667, respectively and Messrs. Peloquin, Turner and Cragun is 1,667, 667 and 667, respectively. During our fiscal year ended March 31, 2023, our compensation package for our non-employee directors consisted of grants of stock options, cash payments, stock issuances and reimbursement of costs and expenses associated with attending our board meetings. We compensate our directors as follows: ● An initial grant of 667 stock options with an exercise price determined as the closing price on the day of joining the board. The options vest in one year and expire in ten years while they are board members or the lesser of five years or remaining life of the stock option once they are no longer board members. ● An annual cash payment of $7,500 for each completed full year of service or prorated for a partial year. ● An annual stock grant of stock equivalent in value to $5,000 for each completed full year of service or prorated for a partial year. The stock price at grant will be determined at the closing price on the day of the annual stockholder meeting. ● An annual grant of 667 stock options with an exercise price determined as the closing price on the day of the annual stockholder meeting. If the annual meeting is held less than 6 months after the board member first joined the board he or she will not receive another option grant. ● A $500 fee for each board meeting and annual meeting attended. Committee meetings and telephone board meetings will be compensated with a $250 fee. ● All expenses are reimbursed for attending board, committee and annual meetings or when their presence at a location away from home is requested. 2022 Equity Incentive Plan On April 12, 2022, our Board of Directors adopted the 2022 Equity Incentive Plan, or the 2022 Plan. The 2022 Plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards collectively, the “Awards.” Awards may be granted under the 2022 Plan to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. The maximum number of shares of common stock initially available for issuance under the 2022 Plan was 233,334 shares of common stock and thereafter an annual increase shall be added as of the first day of the Company’s fiscal year beginning in 2023, equal to the least of (i) 5% of the outstanding common stock on a fully diluted basis as of the end of the Company’s immediately preceding fiscal year, (ii) 33,334 shares, and (iii) a lesser amount as determined by the Board of Directors. Effective April 1, 2023, there were 33,334 additional shares that were allotted to the 2022 Plan based on the annual plan increase. As of the date of filing of this Annual Report, the total shares available for issuance under the 2022 Plan are 158,915. 34 The shares of common stock subject to stock awards granted under the 2022 Plan that lapse, terminate, expire prior to exercise, are canceled or are forfeited, shall again become available for issuance under the 2022 Plan. Shares subject to a stock award under the 2022 Plan shall not again be made available for issuance or delivery under the 2022 Plan if such shares are (i) shares tendered by a participant or retained by the Company as full or partial payment to the Company for the exercise or purchase price of an award or (ii) shares used to satisfy tax withholding obligations in connection with an award. Notwithstanding any other provision of the 2022 Plan to the contrary, unless the plan administrator determines otherwise with respect to a particular award, in the event of a change of control, if and to the extent an outstanding award is not converted, assumed, substituted for or replaced by the successor company, then such award will terminate upon effectiveness of the change of control. Prior to the change of control, the plan administrator may approve accelerated vesting and/or lapse of forfeiture or repurchase restrictions with respect to all or a portion of the unvested portions of such awards, any such determinations to be made by the plan administrator in its sole discretion. A change in control includes: ● certain acquisitions of beneficial ownership of more than 50% of our total voting power; ● a change in the composition of the board of directors during any two-year period such that the individuals who, as of the beginning of such two-year period, constitute the board of directors cease for any reason to constitute at least a majority of the board, as defined in the 2022 Plan; and ● the consummation of a company transaction, as defined in the 2022 Plan. The Board of Directors may amend, suspend or terminate the 2022 Plan or a portion of it at any time; however, to the extent required by applicable law, regulation or stock exchange rule, stockholder approval shall be required for any amendment to the 2022 Plan. The 2022 Plan is scheduled to terminate automatically in ten (10) years following the earlier of (a) the date the Board of Directors adopted the 2022 Plan and (b) the date the stockholders approved the 2022 Plan. 401(k) Plan Effective January 1, 2001, we adopted a voluntary 401(k) plan. All employees with at least one year of service are eligible to participate in our 401(k) plan. We make a matching contribution of 100% of salary deferral contributions up to 3% of pay, plus 50% of salary deferral contributions from 3% to 5% of pay for each payroll period. The amounts charged to earnings for contributions to this plan and administrative costs during the years ended March 31, 2023 and 2022 totaled approximately $74,000 and $70,000, respectively. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding the beneficial ownership of our common stock as of July12, 2023, unless otherwise noted below, for the following: ● Each person or entity known to own beneficially more than 5% of our outstanding common stock as of the date indicated in the corresponding footnote; ● Each of the named executive officers: ● Each director; and ● All current directors and executive officers as a group. Security ownership is based on 4,220,259 shares of our common stock issued and outstanding. In computing the number and percentage of shares beneficially owned by a person, shares of common stock subject to convertible securities and options currently convertible or exercisable, or convertible or exercisable within 60 days of July 12, 2023 are counted as outstanding, but these shares are not counted as outstanding for computing the percentage ownership of any other person. 35 As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted below, and subject to applicable property laws, to our knowledge each person has sole investment and sole voting power over the shares shown as beneficially owned by them. Unless otherwise noted, the principal address of each of the directors and officers listed below is c/o The Singing Machine Company, Inc., 6301 NW 5 th Way, Suite 2900, Fort Lauderdale, FL 33309. Name of Beneficial Owner Common Stock Benefically Owned Percentage of Common Stock Directors and Officers: Gary Atkinson (1) 31,985 * Lionel Marquis (1) 21,334 * Bernardo Melo (1) 43,609 1.0 % Harvey Judkowitz (1) 20,548 * Joseph Kling (1) 6,052 * Mathieu Peloquin (1) 2,284 * Jay Foreman (1) 33,534 * Kenneth Cragun (1) 667 * James Turner (1) 667 * Milton C. Ault III (2) 1,808,000 42.8 % Henry C. Nisser - All Executive Officers and Directors as a Group (11 persons) 1,968,680 46.6 % Beneficial owners of more than 5%: Ault Alliance, Inc. (3) 1,808,000 42.8 % Stingray Group Inc. (4) 544,446 12.9 % * Represents less than 1% (1) Includes as to the person indicated, the following outstanding stock options to purchase shares of the Company’s Common Stock issued under 2022 Plan and other stock option awards, which will be vested and exercisable within 60 days of the record date: 25,001 options held by Gary Atkinson, 31,833 options held by Bernardo Melo, 16,500 options held by Lionel Marquis, 5,669 options held by Harvey Judkowitz, 4,335 options held by Joseph Kling, 1,667 options held by both Mathieu Peloquin and Jay Foreman, and 667 options held by both Kenneth Cragun and James Turner. (2) Represents shares of common stock owned by Ault Lending. Ault Lending is a wholly-owned subsidiary of Ault Alliance. Mr. Ault, the Executive Chairman of Ault Alliance, is deemed to have voting and investment power with respect to the securities held of record by Ault Lending. (3) Based upon the Form 4 filed with the Securities and Exchange Commission on May 25, 2023 by Mr. Ault, which reflects that the shares are owned by Ault Lending, which is a wholly owned subsidiary of Ault Alliance. Mr. Ault, the Executive Chairman of Ault Alliance, is deemed to have voting and dispositive power with respect to the securities held by Ault Lending. The address of Ault Alliance is 11411 Southern Highlands Parkway, Suite 240, Las Vegas, NV 89141. (4) As of March 31, 2023, Eric Boyko indirectly controlled approximately 57.5% of the combined voting power of Stingray’s outstanding shares. As a result, Eric Boyko may be deemed to share beneficial ownership of the shares of common stock and the Stingray Warrants held by Stingray. The address of Stingray Group Inc. is 730 Wellington Street, Montréal, Québec H3C 1T4. The security holder may not exercise the warrants to the extent such exercise would cause the security holder, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding common stock following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of such securities which have not been so exercised. Securities Authorized For Issuance Under Equity Compensation Plans On April 12, 2022, our Board of Directors approved 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. 36 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. Effective April 1, 2023, there were 33,334 additional shares that were allotted to the 2022 Plan based on the annual plan increase. As of the date of filing of this Annual Report, the total shares available for issuance under the 2022 Plan are 158,915. The following table summarizes our equity compensation plan information as of March 31, 2023: Plan Category Number of Securities to be issued upon exercise of outstanding options, warrants and rights Weighted –average exercise price of outstanding option, warrants and rights Number of securities remaining available for future issuance under equity compensation Plans Equity compensation plans approved by security holders 107,752 $ 6.81 125,581 Equity compensation plans not approved by security holders N/A N/A N/A Total 107,752 $ 6.81 125,581 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE A transaction may be a related person transaction if any of our directors, executive officers, owners of more than 5% of our common stock, or their immediate family were involved in a transaction in which the Company was or is to be a participant, and the amount involved exceeds the lesser of $120,000 or 1% of the average of the Company’s total assets at yearend for the last two completed fiscal years. The Company engaged in the following related persons transactions since the beginning of the Company’s last fiscal year or any currently proposed transaction: Due To/From Related Parties During our fiscal year ended March 31, 2023, the Company did business with Stingray who is part of a group of investors who participated in the Private Placement and have acquired a minority interest in the Company (see Note 10 – August 2021 Private Placement). On March 31, 2023, the Company had approximately $0.2 million due from Stingray for music subscription reimbursement. Subordinated Debt and 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. (a former related party) 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 bore 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 fiscal 2023, interest expense was approximately $17,000 on the subordinated note payable. As part of the new Credit Agreement with Fifth Third that the Company entered into on October 14, 2022, the subordinated note in the amount of $352,659, was paid in full on October 26, 2022. Trade The Company has a music subscription sharing agreement with Stingray. For the fiscal year ended March 31, 2023, the Company received music subscription revenue of approximately $0.7 million. This amount was included as a component of net sales in the accompanying consolidated statements of operations. Review, Approval or Ratification of Transactions with Related Persons We believe that the terms of all of the above transactions are commercially reasonable and no less favorable to us than we could have obtained from an unaffiliated third party. Our policy requires that all related parties recuse themselves from negotiating and voting on behalf of our Company in connection with related party transactions. While we do not maintain a written policy with respect to related party transactions, our board of directors routinely reviews potential transactions with those parties we have identified as related parties prior to the consummation of the transaction. Each transaction is reviewed to determine that a related party transaction is entered into by us with the related party pursuant to normal competitive negotiation. We also generally require that all related parties recuse themselves from negotiating and voting on behalf of the Company in connection with related party transactions. 37 Director Independence Independent Audit Committee Nominating and Governance Committee Compensation Committee Director Milton C. Ault, III No Gary Atkinson No Bernardo Melo No James M. Turner No Henry C.W. Nisser Yes Kenneth S. Cragun Yes Harvey Judkowitz Yes C X X Joseph Kling Yes X X C Mathieu Peloquin Yes Jay B. Foreman Yes X C X C – Chairman of committee X – Member of committee ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES EisnerAmper LLP served as our independent registered public accounting firm for the years ended March 31, 2023 and 2022. EisnerAmper LLP’s PCAOB firm ID is 274. Fees and Services The following is a summary of the fees billed to the Singing Machine by our independent registered public accounting firm for professional services rendered for Fiscal 2023 and Fiscal 2022: Fee Category Fiscal 2023 Fiscal 2022 Audit Fees $ 291,900 $ 188,835 All Other Fees 99,750 1,040 Total Fees $ 391,650 $ 189,875 Audit Fees - Consists of fees billed for professional services rendered for the audit of the Singing Machine’s consolidated financial statements, review of the interim consolidated financial statements included in quarterly reports, reviews of registration statements, and services that were provided by EisnerAmper, LLP, respectively. All Other Fees - Consists of fees for products and services other than the services reported above including component auditor services provided in connection with the audit of Ault Alliance, our parent company. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. 38 PART IV ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES (a) The following financial statements for The Singing Machine Company, Inc. and Subsidiaries are filed as a part of this report: Consolidated Balance Sheets— March 31, 2023 and 2022. Consolidated Statements of Operations —Years ended March 31, 2023 and 2022. Consolidated Statements of Cash Flows—Years ended March 31, 2023 and 2022. Consolidated Statements of Shareholders’ Equity—Years ended March 31, 2023 and 2022. Notes to Consolidated Financial Statements Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto. (b) Exhibits. Exhibit No. Description 1.1 Underwriting Agreement, dated May 23, 2022, by and between the Singing Machine and Aegis Capital Corp. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on May 27, 2022) 1.2 At-The-Market Issuance Sales Agreement, dated February 15, 2023, by and between Singing Machine and Aegis Capital Corp. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 17, 2023). 3.1 Certificate of Incorporation of the Singing Machine filed with the Delaware Secretary of State on February 15, 1994 and amendments through April 15, 1999 (incorporated by reference to Exhibit 3.1 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.2 Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on September 29, 2000 (incorporated by reference to Exhibit 3.1 in the Singing Machine’s Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000). 3.3 Corrected Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on March 27, 2001 (incorporated by reference to Exhibit 3.13 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on April 11, 2001). 3.4 Corrected Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on April 4, 2001 (incorporated by referenced to Exhibit 3.12 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on April 11, 2001). 3.5 Certificate of Correction to Corrected Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on April 20, 2001 (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on July 14, 2022). 3.6 Certificate of Amendment to the Certificate of Incorporation filed with the Delaware Secretary of State on January 27, 2006 (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on July 14, 2022). 3.7 Certificate for Renewal and Revival of Charter filed with Delaware Secretary of State on September 25, 2012 (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on July 14, 2022). 3.8 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on May 19, 2022 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on May 25, 2022). 3.9 Amended By-Laws of the Singing Machine (incorporated by reference to Exhibit 3.14 in the Singing Machine’s Annual Report on Form 10-KSB for the year ended March 31, 2001 filed with the SEC on June 29, 2001). 4.1 Description of Registrant’s Securities (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on July 14, 2022). 39 10.1 Lease for Lakeside Plaza executive offices dated July 31, 2011 by and between The Singing Machine Company, Inc. and Lakeside IV, LLC (incorporated by reference to the Singing Machine’s Current Report on Form 10-K filed with the SEC on June 29, 2011). 10.2 Lease for Ontario, CA warehouse dated January 31, 2013 by and between The Singing Machine Company, Inc. and Majestic-CCCIV Partners (incorporated by reference to the Singing Machine’s Current Report on Form 10-K filed with the SEC on June 28, 2013). 10.3+ Executive Change of Control Agreement dated January 3, 2014 by and between The Singing Machine Company, Inc. and Gary Atkinson, Bernardo Melo, and Lionel Marquis ((incorporated by reference to the Singing Machine’s Current Report on Form 10-K filed with the SEC on June 30, 2014). 10.4 First Amendment to Standard Industrial Lease dated June 15, 2020 (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on August 13, 2020). 10.5 Stock Redemption Agreement, dated as of August 5, 2021, by and among The Singing Machine Company, Inc., Koncepts International, Ltd. and Treasure Green Holdings, Ltd. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on August 12, 2021). 10.6 Form of Securities Purchase Agreement (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on August 12, 2021). 10.7 Form of Common Stock Purchase Warrant (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on August 12, 2021). 10.8 Form of Pre-Funded Common Stock Purchase Warrant (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on August 12, 2021). 10.9+ The Singing Machine 2022 Equity Incentive Plan (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on April 18, 2022) 10.10+ Employment Agreement by and between The Singing Machine Company, Inc. and Gary Atkinson (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on April 22, 2022). 10.11+ Employment Agreement by and between The Singing Machine Company, Inc. and Lionel Marquis (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on April 22, 2022). 10.12+ Employment Agreement by and between The Singing Machine Company, Inc. and Bernardo Melo (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on April 22, 2022). 10.13 Form of Indemnification Agreement to be entered into with the Registrant and each of its officers and directors (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on May 27, 2022). 10.14 Credit and Security Agreement by and among The Singing Machine Company, Inc., SMC Logistics, Inc. and Fifth Third Bank, dated October 14, 2022 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on October 20, 2022). 10.15+ Employment Agreement by and between The Singing Machine Company, Inc. and Lionel Marquis (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on January 6, 2023). 10.16 Waiver and First Amendment to Credit and Security Agreement by and among The Singing Machine Company, Inc., SMC Logistics, Inc. and Fifth Third Bank, dated May 19, 2023 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on May 25, 2023). 21 List of subsidiaries of The Singing Machine Company Inc. (incorporated by reference to The Singing Machine’s Registration Statement on Form S-1 filed with the SEC on April 13, 2022) 23.1* Consent of EisnerAmper LLP 31.1* Certification of Gary Atkinson, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2* Certification of Lionel Marquis, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1** Certifying Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 32.2** Certifying Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 101.INS Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * Filed herewith ** Furnished herewith + Compensatory plan or arrangement. ITEM 16. FORM 10-K SUMMARY None. 40 SIGNATURES In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, The Singing Machine Company, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Date: July 14, 2023 By: /s/ Gary Atkinson Gary Atkinson Chief Executive Officer (Principal Executive Officer) Date: July 14, 2023 By: /s/ Lionel Marquis Lionel Marquis Chief Financial Officer (Principal Financial and Accounting Officer) In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The Singing Machine Company, Inc. and in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE /s/ MILTON C. AULT III Executive Board Chairman July 14, 2023 MILTON C. AULT III /s/ GARY ATKINSON Chief Executive Officer and Director July 14, 2023 Gary Atkinson (Principal Executive Officer) /s/ LIONEL MARQUIS Chief Financial Officer July 14, 2023 Lionel Marquis (Principal Financial Officer) /s/ BERNARDO MELO Chief Revenue Officer and Director July 14, 2023 Bernardo Melo (Principal Revenue Officer) /s/ Mathieu Peloquin Director July 14, 2023 /s/ HARVEY JUDKOWITZ Director July 14, 2023 Harvey Judkowitz /s/ Joseph KLING Director July 14, 2023 Joseph Kling /s/ Jay FOREMAN Director July 14, 2023 Jay Foreman /s/ KENNETH CRAGUN Director July 14, 2023 Kenneth Cragun /s/ JAMES TURNER Director July 14, 2023 James Turner /s/ HENRY C. NISSER Director July 14, 2023 Henry C. Nisser 41 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm (PCAOB ID: 274 ) F-2 Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Cash Flows F-6 Consolidated Statements of Shareholders’ Equity F-7 Notes to Consolidated Financial Statements F-8 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of The Singing Machine Company, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Singing Machine Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2023 and 2022, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2023 and 2022, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. F- 2 Variable Consideration As described in Note 3 to the consolidated financial statements, the Company provides for variable consideration estimated at the expected value or at the most likely amount depending on the type of consideration. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Variable consideration primarily includes reserves for sales returns and accruals for promotional incentives. The Company estimates variable consideration under its return programs for goods returned from the customer for various reasons, whereby a sales return reserve is recorded based on historic return amounts, specific events as identified and management estimates. The Company selectively participates in retailer’s promotional incentives to maximize sales of the Company’s products on the retail floor or to assist in developing consumer awareness of new product launches, by providing marketing allowances to their customers. The Company’s reserve for sales returns were approximately $0.9 million as of March 31, 2023. The Company’s accrual for promotional incentives was approximately $1.1 million as of March 31, 2023. We identified management’s estimates for variable consideration as a critical audit matter due to the fact that there was significant judgment required by management with respect to measurement uncertainty, as the calculation of these reserves and allowances includes assumptions such as product sell through at retailers, as well historical product sales used to predict future sales in evaluating the net realizable value of inventory returns. This in turn led to a high degree of auditor judgment, subjectivity and effort in applying the procedures related to those assumptions. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. We obtained an understanding and evaluated the design of controls over the Company’s estimates for variable consideration. Our procedures also included, among others,(1) recalculating the sales return reserve based on our review of returns received subsequent to year end and the net realizable value of the returned goods based on historical margins and product sales projections; (2) recalculating the Company’s promotional incentive accrual based on specific customer arrangements and programs along with supporting documentation from those customers; (3) performing a sensitivity analysis of the Company’s variable consideration by recalculating using our independent assumptions; (4)evaluating the Company’s ability to accurately estimate the sales return reserve by comparing historically recorded reserves to the actual amount that was ultimately claimed by the retailers; and (5) analyzing year over year trends in the reserve and allowance in comparison with revenue trends to further evaluate reasonableness of the estimate and consistency with expectations. Inventory Valuation As described in Note 3 to the consolidated financial statements, the Company’s inventories are stated at the lower of cost or net realizable value. The Company maintains its inventory at the lower of cost or net realizable value based primarily on the age of the inventory, estimated required sell-through time and whether items are selling below cost. In determining appropriate inventory reserve percentages, the Company evaluates a number of factors including its historical write off experience, the specific products affected, its historic recovery percentages on various methods of liquidations, as well as forecasts of future sales. Inventories, net, and the inventory reserve at March 31, 2023, totaled $9.6 million and $0.9 million, respectively. We identified the valuation of inventory as a critical audit matter due to the significant judgments necessary to identify and record the inventory at the lower of cost or net realizable value timely. This in turn led to a high degree of auditor judgement, subjectivity and effort in, performing audit procedures to evaluate management’s estimates of the net realizable value for the inventory on-hand as of the reporting date. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. We obtained an understanding and evaluated the design of controls over the Company’s inventory valuation. Our procedures related to management’s estimates of the net realizable value of the inventory on-hand as of the reporting date included the following, among others, (1) evaluating of the appropriateness and consistency of management’s methodology and assumptions used in determining the inventory reserve; (2) obtaining the Company’s inventory at the lower of cost or net realizable value calculation and testing the mathematical accuracy; (3) testing the accuracy and completeness of the underlying data used in the calculation of the Company’s net realizable value; and (4) selecting a sample of inventory items, evaluating historical sales performance relative to management’s conclusions on the ability to sell through the inventory on-hand at the forecasted levels as well as testing sales subsequent to year-end to evaluate the Company’s ability to accurately estimate the inventory reserve relative to the net realizable value. /s/ EisnerAmper LLP EISNERAMPER LLP We have served as the Company’s auditor since 2016. Iselin, New Jersey July 14, 2023 F- 3 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS March 31, 2023 March 31, 2022 Assets Current Assets Cash $ 2,894,574 $ 2,290,483 Accounts receivable, net of allowances of $ 165,986 and $ 122,550 , respectively 2,075,086 2,785,038 Due from Crestmark Bank - 100,822 Accounts receivable related party - Stingray Group, Inc. 218,328 152,212 Accounts receivable related party - Ault Alliance, Inc. 20,750 - Inventories, net 9,639,992 14,161,636 Prepaid expenses and other current assets 266,068 344,409 Deferred financing costs 84,667 7,813 Total Current Assets 15,199,465 19,842,413 Property and equipment, net 633,207 565,094 Deferred financing costs, net of current portion 130,528 - Deferred tax assets - 892,559 Operating Leases - right of use assets 561,185 1,279,347 Other non-current assets 124,212 86,441 Total Assets $ 16,648,597 $ 22,665,854 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 1,769,348 $ 5,328,215 Accrued expenses 2,265,424 1,732,355 Due to related party - Starlight Consumer Electronics Co., Ltd. - 14,400 Due to related party - Starlight R&D, Ltd. - 48,650 Revolving lines of credit - 2,500,000 Refunds due to customers 583,323 97,968 Reserve for sales returns 900,000 990,000 Current portion of finance leases 18,162 7,605 Current portion of installment notes 80,795 74,300 Current portion of operating lease liabilities 508,515 876,259 Subordinated note payable - Starlight Marketing Development, Ltd. - 352,659 Total Current Liabilities 6,125,567 12,022,411 Finance leases, net of current portion 46,142 10,620 Installment notes, net of current portion 57,855 138,649 Operating lease liabilities, net of current portion 87,988 457,750 Total Liabilities 6,317,552 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; 3,184,439 shares issued, 3,167,489 shares outstanding and 1,221,209 shares issued and outstanding, respectively 31,675 12,212 Additional paid-in capital 29,822,205 24,902,694 Subscriptions receivable ( 5,891 ) - Accumulated deficit ( 19,516,944 ) ( 14,878,482 ) Total Shareholders’ Equity 10,331,045 10,036,424 Total Liabilities and Shareholders’ Equity $ 16,648,597 $ 22,665,854 See notes to the consolidated financial statements F- 4 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS March 31, 2023 March 31, 2022 For the Twelve Months Ended March 31, 2023 March 31, 2022 Net Sales $ 39,299,280 $ 47,512,161 Cost of Goods Sold 30,090,686 36,697,383 Gross Profit 9,208,594 10,814,778 Operating Expenses Selling expenses 3,441,975 3,588,276 General and administrative expenses 9,236,899 6,911,377 Depreciation 228,004 245,890 Total Operating Expenses 12,906,878 10,745,543 (Loss) Income from Operations ( 3,698,284 ) 69,235 Other Income (Expense), net Gain from Paycheck Protection Plan loan forgiveness - 448,242 Gain - related party - 11,236 Gain from Employee Retension Credit Program refund 704,297 - Gain from settlement of accounts payable 48,650 339,311 Loss from extinguishment of debt ( 183,333 ) - Interest expense ( 432,700 ) ( 535,202 ) Finance costs ( 46,618 ) ( 45,047 ) Total Other Income (Expense), net 90,296 218,540 (Loss) Income Before Income Tax (Provision) ( 3,607,988 ) 287,775 Income Tax (Provision) ( 1,030,474 ) ( 57,304 ) Net (Loss) Income $ ( 4,638,462 ) $ 230,471 Net (Loss) Income per Common Share Basic $ ( 1.65 ) $ 0.14 Diluted $ ( 1.65 ) $ 0.14 Weighted Average Common and Common Equivalent Shares: Basic 2,811,872 1,614,506 Diluted 2,811,872 1,623,397 See notes to the consolidated financial statements F- 5 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS March 31, 2023 March 31, 2022 For the Twelve Months Ended March 31, 2023 March 31, 2022 Cash flows from operating activities Net (Loss) Income $ ( 4,638,462 ) $ 230,471 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation 228,004 245,890 Amortization of deferred financing costs 46,618 45,047 Change in inventory reserve 535,553 ( 271,892 ) Change in allowance for bad debts 43,436 ( 16,030 ) Loss from disposal of property and equipment 2,565 4,394 Stock based compensation 381,826 44,287 Change in net deferred tax assets 892,559 ( 5,395 ) Loss on debt extinguishment 183,333 - Paycheck Protection Plan loan forgiveness - ( 448,242 ) Gain - related party - ( 11,236 ) Gain from extinguishment of accounts payable ( 48,650 ) ( 339,311 ) Changes in operating assets and liabilities: Accounts receivable 666,516 ( 558,127 ) Due from banks 100,822 4,456,298 Accounts receivable - related parties ( 86,866 ) ( 64,171 ) Inventories 3,986,091 ( 8,399,489 ) Prepaid expenses and other current assets 78,341 ( 123,338 ) Other non-current assets ( 37,771 ) 60,732 Accounts payable ( 3,510,217 ) 3,217,659 Accrued expenses 533,069 77,198 Due to related parties ( 63,050 ) - Customer deposits - ( 139,064 ) Refunds due to customers 485,355 ( 47,440 ) Reserve for sales returns ( 90,000 ) 30,000 Operating lease liabilities, net of operating leases - right of use assets ( 19,344 ) ( 171 ) Net cash used in operating activities ( 330,272 ) ( 2,011,930 ) Cash flows from investing activities Purchase of property and equipment ( 243,729 ) ( 117,573 ) Net cash used in investing activities ( 243,729 ) ( 117,573 ) Cash flows from financing activities Proceeds from Issuance of stock - net of transaction expenses 3,362,750 9,000,579 Proceeds from Issuance of stock - at the market offering 30,522 - Payment of redemption and retirement of treasury stock - ( 7,162,451 ) Net (payment) proceeds from revolving lines of credit ( 2,500,000 ) 2,435,085 Payment of deferred financing charges ( 254,000 ) ( 37,501 ) Payment of early termination fees on revolving lines of credit ( 183,333 ) - Payments on installment notes ( 74,299 ) ( 68,332 ) Proceeds from exercise of stock options - 14,000 Proceeds from exercise of pre-funded warrants 168,334 - Proceeds from exercise of common warrants 989,651 - Payment on subordinated note payable ( 352,659 ) ( 150,000 ) Payments on finance leases ( 8,874 ) ( 7,973 ) Net cash provided by financing activities 1,178,092 4,023,407 Net change in cash 604,091 1,893,904 Cash at beginning of year 2,290,483 396,579 Cash at end of period $ 2,894,574 $ 2,290,483 Supplemental disclosures of cash flow information: Cash paid for interest $ 481,425 $ 546,545 Cash paid for income taxes - SMC (Comercial Offshore de Macau) Limitada $ 34,390 $ - Equipment purchased under capital lease $ 54,953 $ 23,651 Issuance of common stock and warrants for stock issuance expenses $ 243,901 $ 547,838 Operating leases - right of use assets and lease liabilities at inception of lease $ 191,951 $ 16,364 See notes to the consolidated financial statements F- 6 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the twelve months ended March 31, 2023 and 2022 Shares Amount Capital Receivable Deficit Total Common Stock Additional Paid in Subscriptions Accumulated Shares Amount Capital Receivable Deficit Total Balance at March 31, 2021 1,301,358 $ 13,014 $ 20,150,715 $ - $ ( 12,254,191 ) $ 7,909,538 Net Income - - - - 230,471 230,471 Issuance of stock 550,000 5,500 4,944,500 - - 4,950,000 Issuance of pre-funded warrants - - 4,881,667 - - 4,881,667 Payment of stock issuance expenses - - ( 831,088 ) - - ( 831,088 ) Issuance of stock for stock issuance expenses 19,047 190 ( 190 ) - - Redemption and retirement of treasury shares ( 654,105 ) ( 6,542 ) ( 4,301,147 ) - ( 2,854,762 ) ( 7,162,451 ) Issuance of common stock - directors 575 6 4,994 - - 5,000 Issuance of common stock - non-employee 1,667 17 16,983 - - 17,000 Employee compensation-stock option - - 22,287 - - 22,287 Exercise of stock options 2,667 27 13,973 - - 14,000 Balance at March 31, 2022 1,221,209 12,212 24,902,694 - ( 14,878,482 ) 10,036,424 Net Loss - - - - ( 4,638,462 ) ( 4,638,462 ) Net income (Loss) - - - - ( 4,638,462 ) ( 4,638,462 ) Issuance of common stock 1,000,000 10,000 3,990,000 - - 4,000,000 Payment of stock issuance expenses - - ( 637,250 ) - - ( 637,250 ) Issuance of common stock - at the market offering 14,230 143 36,270 ( 5,891 ) - 30,522 Exercise of pre-funded warrants 561,113 5,611 162,723 - - 168,334 Exercise of common stock warrants 353,445 3,534 986,117 - - 989,651 Issuance of common stock - directors 2,468 25 19,991 - - 20,016 Issuance of common stock - officers 3,335 33 31,216 - - 31,249 Issuance of common stock - non-employee 10,000 100 93,600 - - 93,700 Employee compensation-stock option - - 236,861 - - 236,861 Rounding of common stock issued due to reverse split 1,688 17 ( 17 ) - - - Balance at March 31, 2023 3,167,488 $ 31,675 $ 29,822,205 $ ( 5,891 ) $ ( 19,516,944 ) $ 10,331,045 Balance 3,167,488 $ 31,675 $ 29,822,205 $ ( 5,891 ) $ ( 19,516,944 ) $ 10,331,045 See notes to the consolidated financial statements. F- 7 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 NOTE 1 - BASIS OF PRESENTATION OVERVIEW The Singing Machine Company, Inc., a Delaware corporation (the “Company,” “SMC”, “The Singing Machine”), and wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMCL”), SMC-Music, Inc. (“SMCM”) and SMC (HK) Limited (“SMH”), are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings. The products are sold directly to distributors and retail customers. RECENT EQUITY EVENTS On February 15, 2023, The Singing Machine Company, Inc. (the “Company”), entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Aegis Capital Corp, as sales agent (the “Agent”), pursuant to which the Company may offer and sell, from time to time, through the Agent (the “Offering”), up to approximately $ 1.8 million in shares of its common stock. Any shares offered and sold in the Offering were issued pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-269183) filed with the Securities and Exchange Commission (the “SEC”) on January 11, 2023 (the “Registration Statement”) and declared effective by the SEC on January 20, 2023, and the prospectus supplement relating to the Offering filed with the SEC on February 15, 2023. Under the terms of the Sales Agreement, the Agent was entitled to a commission at a rate of 3.0 % of the gross proceeds from each sale of shares under the Sales Agreement. The Company also reimbursed the Agent for certain expenses incurred in connection with the Sales Agreement and has agreed to provide indemnification and contribution to the Agent with respect to certain liabilities, including liabilities under the Securities Act and the Securities Exchange Act of 1934, as amended. On February 15, 2023, the Company launched an At-The-Market (“ATM”) offering pursuant to the Sales Agreement. During the fiscal year ended March 31, 2023, the Company received total net proceeds from the ATM of approximately $ 36,000 on sales of 14,230 shares of common stock at an average price of $ 2.56 per share. Subsequent to March 31, 2023, the Company received total net proceeds from the ATM of approximately $ 1.7 million on sales of 1,052,770 shares of common stock at an average price of $ 1.64 per share. The offering closed on May 12, 2023. NOTE 2 – LIQUIDITY The Company reported a net loss of approximately $ 4.6 million and used cash in operating activities of approximately $ 0.3 million for the fiscal year ended March 31, 2023. On October 14, 2022 the Company entered into the Credit Facility with Fifth Third Bank, as Lender replacing the existing credit facilities with Crestmark Bank (“Crestmark”) and Iron Horse Credit (“IHC”) that were terminated by the Company on October 13, 2022. The Credit Facility 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 Facility matures on October 14, 2025. As of March 31, 2023 the Company was in default under the Credit Facility due to non-compliance with the fixed charge coverage ratio covenant of 1:05 : 1.0. On May 19, 2023 the Company executed a Waiver and First Amendment agreement which provides for a waiver of previous defaults and new covenants that are required. The Company must comply monthly with minimum liquidity (defined as excess loan availability plus cash on hand) of $ 2.5 million between February and July and $ 4.0 million between September and June. The Company must also maintain pre-defined minimum operating cash flows between February and August, 2023 until the Company achieves a fixed charge ratio of 1.15 : 1.0 beginning in September 2023 and throughout the remaining term of the agreement. As of this filing, the Company is in compliance with the amended covenants. On February 15, 2023 the Company launched an At-The-Market (“ATM”) offering pursuant to the Sales Agreement with Aegis Captial Corp. During the fiscal year ended March 31, 2023, the Company received total net proceeds from the ATM of approximately $ 36,000 on sales of 14,230 shares of common stock at an average price of $ 2.56 per share. After March 31, 2023, the Company received total net proceeds from the ATM of approximately $ 1.7 million on sales of 1,052,770 shares of common stock at an average price of $ 1.64 per share. The offering closed on May 12, 2023. The Company believes that our cash on hand, proceeds received from the ATM subsequent to March 31, 2023, working capital (net of cash), cash expected to be generated from our operating forecast, along with the availability of cash from our credit facilities (See Note 6 – BANK FINANCING) will be adequate to meet the Company’s liquidity requirements for at least twelve months from the filing of this report. As of the date of this filing, the Company has cash on hand of $ 1.6 million and availability under the Credit Facility of approximately $ 1.8 million. 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 July 14, 2024. F- 8 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, its Macau and Hong Kong subsidiaries, SMCL, and SMCM. All inter-company accounts and transactions have been eliminated in consolidation for all periods presented. USE OF ESTIMATES The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. However, circumstances could change which may alter future expectations. COLLECTIBILITY OF ACCOUNTS RECEIVABLE The Singing Machine’s allowance for doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be in an amount sufficient to respond to normal business conditions. Management sets 100 % reserves for customers in bankruptcy and other allowances based upon historical collection experience. The Company is subject to chargebacks from customers for co-op program incentives, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations. FOREIGN CURRENCY TRANSLATION The functional currency of the Macau and Hong Kong subsidiaries 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 operations and translations would be recorded in a separate component of shareholders’ equity. Any such amounts were not material during the periods presented. Concentration of Credit Risk At times, the Company maintains cash in United States bank accounts that are in excess of the Federal Deposit Insurance Corporation insured amounts. The Company maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at March 31, 2023 and 2022 were approximately $ 0.2 million and $ 0.1 million, respectively. The Company regularly monitors the financial stability of this financial institution and believes that it is not exposed to any significant credit risk in cash and cash equivalents. However, in March and April 2023, certain U.S. government banking regulators took steps to intervene in the operations of certain financial institutions due to liquidity concerns, which caused general heightened uncertainties in financial markets. While these events have not had a material direct impact on the Company’s operations, if further liquidity and financial stability concerns arise with respect to banks and financial institutions, either nationally or in specific regions, the Company’s ability to access cash or enter into new financing arrangements may be threatened, which could have a material adverse effect on its business, financial condition and results of operations. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable. INVENTORY Inventories are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected future inventory returns due to warranty and allowance programs. As of both March 31, 2023 and 2022 the estimated amounts for these future inventory returns were approximately $ 0.6 million. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of March 31, 2023 and 2022 the Company had inventory reserves of approximately and $ 0.9 million and $ 0.4 million, respectively 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.” F- 9 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using accelerated and straight-line methods. FAIR VALUE OF FINANCIAL INSTRUMENTS We follow FASB ASC 825, “Financial Instruments”, which requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses, customer deposits, refunds due to customers, and due to related parties approximates fair value due to the relatively short period to maturity for these instruments. The carrying amounts on the notes payable, finance leases and installment notes approximate fair value either due to the relatively short period to maturity or the related interest is accrued at a rate similar to market rates. The carrying amounts on the revolving line of credit approximates fair value due the relatively short period to maturity and related interest accrued at market rates. REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS The Company recognizes revenue in accordance with FASB ASC 606, “Revenue from Contracts with Customers”. All revenue is generated from contracts with customers. The Company recognizes revenue when the control of the goods sold is transferred to the customer, in an amount, referred to as the transaction price, that reflects the consideration to which the Company is expected to be entitled in exchange for those goods. The Company determines revenue recognition utilizing the following five steps: (1) identification of the contract with a customer, (2) identification of the performance obligations in the contract (promised goods or services that are distinct), (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations, and (5) recognition of revenue when, or as, the Company transfers control of the product or service for each performance obligation. The Company selectively participates in a retailer’s co-op promotion incentives to maximize sales of the Company’s products on the retail floor or to assist in developing consumer awareness of new product launches, by providing marketing fund allowances to our customers. As these co-op promotion initiatives are not a distinct good or service and the Company cannot reasonably estimate the fair value of the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers are recorded as a reduction to net sales. Co-op promotion incentives were approximately $ 2.3 million during fiscal 2023 and $ 2.0 million during fiscal 2022. The Company’s contracts with customers consist of one performance obligation (the sale of the Company’s products). The Company’s contracts have no financing elements, payment terms are less than 120 days and have no further contract asset or liability obligations once control of goods is transferred to the customer. Revenue is recorded in the amount of consideration the Company expects to receive for the sale of these goods. Costs incurred in fulfilling contracts with customers include administrative costs associated with the procurement of goods are included in general and administrative expenses, in-bound freight costs are included in the cost of goods sold and accrued sales representative commissions are included in selling expenses in the accompanying consolidated statements of 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 were approximately $ 0.9 million and $ 1.0 million as of March 31, 2023 and 2022, 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 14 – SEGMENT INFORMATION). F- 10 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 During fiscal 2023 and 2022 revenue was derived from five different major product lines. Disaggregated approximate revenue from these product lines consisted of the following: SCHEDULE OF DISAGGREGATION OF REVENUE Product Line March 31, 2023 March 31, 2022 Revenue by Product Line Fiscal Years Ended Product Line March 31, 2023 March 31, 2022 Karaoke Machines $ 28,800,000 $ 38,900,000 Microphones and Accessories 7,800,000 4,200,000 SMC Kids Toys 1,900,000 2,300,000 Licensed Products 100,000 1,600,000 Music Subscriptions 700,000 500,000 Total Net Sales $ 39,300,000 $ 47,500,000 SHIPPING AND HANDLING COSTS Shipping and handling activities are performed before the customer obtains control of the goods sold to them and are considered activities to fulfill the Company’s promise to transfer the goods. For Fiscal 2023 and 2022 shipping and handling expenses were approximately $ 0.5 million and $ 0.9 million, respectively. These expenses are classified as a component of selling expenses in the accompanying consolidated statements of operations. STOCK-BASED COMPENSATION The Company follows the provisions of FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the consolidated statements of operations over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense in fiscal years ended March 31, 2023 and 2022 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award. For the fiscal years ended March 31, 2023 and 2022, the stock option expense was approximately $ 237,000 and $ 22,000 , respectively. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the assumptions outlined below. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. ● For the year ended March 31, 2023: expected dividend yield of 0 % , risk-free interest rate between 2.63 % and 3.21 % , respectively, with volatility between 166.1 % and 196.3 % , respectively with an expected term of three years . ● For the year ended March 31, 2022: expected dividend yield of 0 % , risk-free interest rate between 0.43 % and 0.96 % , respectively, with volatility between 149.5 % and 157.0 % , respectively with an expected term of three years . The Company’s directors were issued shares of stock as compensation for their service. For the years ended March 31, 2023 and 2022, the stock compensation expense to directors was $ 20,000 and $ 5,000 , respectively. RESEARCH AND DEVELOPMENT COSTS All research and development costs are charged to results of operations as incurred. These expenses are shown as a component of general and administrative expenses in the consolidated statements of operations. For both years ended March 31, 2023 and 2022, these amounts totaled approximately $ 0.1 million. INCOME TAXES The Company follows the provisions of FASB ASC 740 “Accounting for Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized. During Fiscal 2023, the Company was eligible to receive payroll tax refunds from the Employee Retention Credit program (“ECR”). The ECR program was established under the Consolidated Appropriations (CARES) Act in 2021 to assist employers who suffered financial losses during the COVID pandemic but kept employees on their payrolls during 2020 and 2021. The Company received approximately $ 0.7 million in payroll tax refunds (net of approximately $ 0.1 million in processing fees) from the ECR program in Fiscal 2023 that were recorded as other income in the accompanying consolidated financial statements. As these were considered tax refunds and not credits, the Company recorded an income tax payable of approximately $ 91,000 due to amendments to the 2020 and 2021 returns to account for refunds of payroll taxes received in Fiscal 2023 from the ERC program for those periods. F- 11 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. As of March 31, 2023 and 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 (LOSS) PER SHARE Computation of dilutive shares for fiscal years ended March 31, 2023 and 2022 are as follows: SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNING PER SHARE Fiscal year ended March 31, 2023 Fiscal year ended March 31, 2022 Basic weighted average common shares outstanding 2,811,872 1,614,506 Effect of dilutive stock options - 8,891 Diluted weighted average of common shares outstanding 2,811,872 1,623,397 Basic net income 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 fiscal year ended March 31, 2023, options to purchase 53,675 shares of common stock and 902,113 common stock warrants were excluded in the calculation of diluted net income (loss) per share as the result would have been anti-dilutive. For the fiscal year ended March 31, 2022, pre-funded warrants to purchase 561,111 shares of common stock were included in basic weighted average shares outstanding as deemed outstanding. Options to purchase 8,891 shares of common stock were included in the calculation of diluted net income per share. For the fiscal year ended March 31, 2022, options and warrants to purchase approximately 56,000 shares of common stock were excluded in the calculation of diluted net income (loss) per share as the result would have been anti-dilutive. RECENT ACCOUNTING PRONOUNCEMENTS : In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326) . This ASU represents a significant change in the current accounting model by requiring immediate recognition of management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which delayed recognition of expected losses that might not yet have met the threshold of being probable. The amendments in ASU 2016-03 for smaller reporting companies are effective for the Company beginning April 1, 2023, including interim periods within that fiscal year. The Company adopted ASU 2016-13 on April 1, 2023. The adoption of ASU 2016-13 did not result in any material effects to the consolidated financial statements or related disclosures. F- 12 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 NOTE 4 – INVENTORIES, NET Inventories are comprised of the following components: SCHEDULE OF INVENTORY March 31, 2023 March 31, 2022 Finished Goods $ 9,400,000 $ 10,600,000 Inventory in Transit 600,000 3,300,000 Estimated Amount of Future Returns 500,000 700,000 Subtotal 10,500,000 14,600,000 Less: Inventory Reserve 900,000 400,000 Total Inventories $ 9,600,000 $ 14,200,000 NOTE 5 - PROPERTY AND EQUIPMENT A summary of property and equipment is as follows: SUMMARY OF PROPERTY AND EQUIPMENT USEFUL LIFE MARCH 31, 2023 MARCH 31, 2022 Computer and office equipment 5 - 7 years $ 500,000 $ 400,000 Furniture and fixtures 7 years 100,000 100,000 Warehouse equipment 7 years 200,000 200,000 Molds and tooling 3 - 5 years 2,200,000 2,000,000 3,000,000 2,700,000 Less: Accumulated depreciation 2,400,000 2,100,000 $ 600,000 $ 600,000 Depreciation expense for both fiscal years ended 2023 and 2022 was approximately $ 0.2 million. NOTE 6 – FINANCING Credit and Security Agreement with Fifth Third Bank, National Association: On October 14, 2022 the Company entered into the Credit Agreement with Fifth Third, as Lender replacing the Company’s credit facilities with Crestmark and IHC 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 . Costs associated with closing of the Credit Agreement of approximately $ 254,000 were deferred and are being amortized over a three-year period. During the fiscal years ended March 31, 2023 and 2022, the Company incurred amortization expense of approximately $ 39,000 and $ 0 , respectively associated with the amortization of deferred financing costs from the Credit Agreement. The revolving credit facility bears interest of (a) the Prime Rate plus 0.50 % or (b) the 30-day Term SOFR rate plus 3.00 % (subject in each case to a floor of 0.50 % ), depending on the type of loan requested by the Company. “Term SOFR” means the forward-looking SOFR rate administered by CME Group, Inc. (or other administrator selected by Fifth Third) and published on the applicable Bloomberg LP screen page (or such other commercially available source providing such quotations as may be selected by Fifth Third), fixed by the administrator thereof two business days prior to the commencement of the applicable Interest Period (provided, however, that if Term SOFR is not published for such Business Day, then Term SOFR shall be determined by reference to the immediately preceding Business Day on which such rate is published), rounded upwards, if necessary, to the next 1/8th of 1% and adjusted for reserves if Fifth Third is required to maintain reserves with respect to the relevant Loans, all as determined by Lender in accordance with the Credit Agreement and Fifth Third’s loan systems and procedures periodically in effect. An Unused Line Fee of 0.35 % per annum of the excess of the Revolving Credit Facility over the average monthly balance of outstanding revolving loans, payable monthly. The obligations under the Credit Agreement are secured by all of the assets of the Company and SMC, presently owned or later acquired, and all cash and non-cash proceeds thereof (including, without limitation, insurance proceeds). During the fiscal years ended March 31, 2023 and 2022, the Company incurred interest expense of approximately $ 33,000 and $ 0 , respectfully. F- 13 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 Under the Credit Agreement: ● Accounts Receivable advance rate up to an 85% against eligible Accounts Receivable assuming dilution is under 5% of sales, plus ● Inventory advance of up to 85% of the Net Orderly Liquidation Value of eligible inventory as determined by an appraiser satisfactory to Fifth Third, with a sublimit to be determined based on Fifth Third’ s continuing due diligence. The inventory advance rate will increase to 95% of the Net Orderly Liquidation Value of eligible inventory from April through June (or another 3-month time frame to be determined based on Fifth Third’s continuing due diligence) each year to support seasonal working capital needs. ● The Company must maintain a Minimum Fixed Charge Coverage of 1.05 to 1. ● Covenants may also include reasonable limitations on dividends, distributions, and management fees. ● The first Fixed Charge Coverage test will be the period from close to September 30, 2022, building to a trailing twelve months. As of March 31, 2023, the Company was in default under the Credit Facility due to non-compliance with the fixed charge coverage ratio covenant of 1:05 : 1.0. On May 19, 2023 the Company executed a Waiver and First Amendment agreement which provides for a waiver of previous defaults and new covenants that are required. The Company must comply monthly with minimum liquidity (defined as excess loan availability plus cash on hand) of $ 2.5 million between February and July and $ 4.0 million between September and June. The Company must also maintain pre-defined minimum operating cash flows between February and August, 2023 until the Company achieves a fixed charge ratio of 1.15 : 1.0 beginning in September 2023 and throughout the remaining term of the agreement. As of this filing the Company was in compliance with the amended covenants and there was approximately $ 0.7 million borrowed against the Credit Agreement with an additional availability of $ 1.8 million. 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 IHC 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 on eligible accounts receivable. On October 14, 2022, the Company entered into the Credit Agreement with Fifth Third, as Lender replacing the Company’s credit facilities with Crestmark and IHC that were terminated by the Company on October 13, 2022. For the fiscal years ended March 31, 2023 and 2022 the Company incurred approximately $ 8,000 and $ 45,000 respectively in amortization costs for deferred financing charges associated with the closing of the Credit and Security agreements with Crestmark and IHC. The Company also incurred interest expense of approximately $ 0.4 million and $ 0.5 million for the fiscal years ended March 31, 2023 and 2022, respectively. The total cost to exit the Intercreditor Revolving Credit Facility with Crestmark and IHC was approximately $ 0.2 million and was recorded as a loss from extinguishment of debt as a component of Other (Expenses) Income, net in the accompanying consolidated statements of operations. 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 fiscal years ended March 31, 2023 and 2022, 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 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 ERP System project over a term of 60 months at a cost of approximately $ 365,000 . As of March 31, 2023, the Company had executed three installment notes totaling approximately $0.4 million for payments issued to the project vendor. The installment notes have 60-month terms with interest rates of 7.58 % , 8.55 % and 9.25 % , respectively. The installment notes are payable in monthly installments of $ 7,459 which include principal and interest. For the fiscal years ended March 31, 2023 and 2022, there was an outstanding balance on the installment notes of approximately $ 0.1 million and $ 0.2 million, respectively. For the fiscal years March 31, 2023 and 2022, the Company incurred interest expense of approximately $ 15,000 and $ 21,000 , respectively. F- 14 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 Subordinated Debt/Note Payable In conjunction with the Crestmark Facility and IHC Facility, the parties entered into a subordination agreement on related party debt due to Starlight Marketing Development, Ltd. (former related party) 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 both fiscal years ended March 31, 2023 and 2022, interest expense was approximately $ 17,000 on the subordinated note payable and the related party subordinated debt. As of March 31, 2023 and March 31, 2022, the remaining amount due on the note payable was approximately $ 0 and $ 353,000 , respectively. The remaining amount due on the subordinated note payable was classified as a current liability as of March 31, 2022 on the consolidated balance sheets. As part of the new Credit Agreement with Fifth Third that the Company entered into on October 14, 2022, the subordinated note was subsequently paid in full on October 26, 2022. NOTE 7 - COMMITMENTS AND CONTINGENCIES LEGAL MATTERS We are not a party to, and our property is not the subject of, any material legal proceedings. LEASES The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date. The liability is equal to the present value of the remaining minimum lease payments. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). As the interest rate implicit in the Company’s operating leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The Company utilizes the implicit rate for its finance leases. Operating Leases We have operating lease agreements for offices and a warehouse facility in Florida, California and Hong Kong expiring in various years through 2025. We entered into an operating lease agreement, effective October 1, 2017, for our corporate headquarters located in Fort Lauderdale, Florida where we lease approximately 6,500 square feet of office space. The lease expires on March 31, 2024 . The base rent payment is approximately $ 9,950 per month, subject to annual adjustments. We entered into an operating lease agreement, effective June 1, 2013, for 86,000 square feet of warehouse space in Ontario, California for our logistics operations. On June 15, 2020, we executed a three-year lease extension which will expire on August 31, 2023. The Company does not intend to renew the lease agreement and has signed a service agreement with a third-party logistics company to provide domestic and Canadian warehousing services effective September 1, 2023. The base rent payment is approximately $ 69,300 per month for the remaining term of the lease. We entered into an operating lease agreement, effective October 15, 2022, for our administrative office located in Hong Kong where we lease approximately 1,890 square feet of office space. The lease expires on October 14, 2025 . The base rent payment is approximately $ 4,900 per month for the entire term of the lease. Lease expense for our operating leases is recognized on a straight-line basis over the lease terms. Finance Leases In February 2023, we entered into a financing leasing arrangement with Wells Fargo Equipment Finance to finance the leasing of two used forklifts in the amount of approximately $ 55,000 . The lease requires monthly payments in the amount of approximately $ 1,075 per month over a total lease term of 60 months which commenced on February 1, 2023. The agreement has an effective interest rate of 6.5 % and the Company has the option to purchase the equipment at the end of the lease term for one dollar. As of March 31, 2023 and March 31, 2022, the remaining amounts due on this financing leasing arrangement was approximately $ 53,000 and $ 0 , respectively. F- 15 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 On July 1, 2021, we entered into a long-term capital leasing arrangement with Union Credit Corporation to finance the leasing of a used forklift in the amount of approximately $ 24,000 . The lease require monthly payments in the amount of approximately $ 755 per month over a total lease term of 36 months which commenced on July 1, 2021. The agreement has an effective interest rate of 9.9 % and the Company has the option to purchase the equipment at the end of the lease term for one dollar. As of March 31, 2023 and March 31, 2022, the remaining amounts due on this capital leasing arrangement was approximately $ 11,000 and $ 18,000 , respectively. For the fiscal years ended March 31, 2023 and 2022, the Company incurred interest expense of $ 2,055 and $ 1,160 , respectively, on these finance leases. Supplemental balance sheet information related to leases as of March 31, 2023 is as follows: SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES Assets: Operating lease - right-of-use assets $ 561,185 Finance leases as a component of property and equipment, net of accumulated depreciation of $ 8,798 75,306 Liabilities Current Current portion of operating leases $ 508,515 Current portion of finance leases 18,162 Noncurrent Operating lease liabilities, net of current portion $ 87,988 Finance leases, net of current portion 46,142 Supplemental statement of operations information related to leases for the fiscal year ended March 31, 2023 is as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE Fiscal Year Ended March 31, 2023 Operating lease expense as a component of general and administrative expenses $ 1,057,798 Finance lease cost Depreciation of leased assets as a component of depreciation $ 8,798 Interest on finance lease liabilities as a component of interest expense $ 2,055 Supplemental cash flow information related to leases for the fiscal year ended March 31, 2023 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 $ 959,790 Financing cash flow paid for finance leases $ 9,165 Lease term and Discount Rate Weighted average remaining lease term (months) Operating leases 12.4 Finance leases 31.8 Weighted average discount rate Operating leases 6.50 % Finance leases 9.86 % Scheduled maturities of operating and finance lease liabilities outstanding as of March 31, 2023 are as follows: SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING AND FINANCE LEASES Year Operating Leases Finance Leases 2023 $ 480,709 $ 16,476 2024 89,268 17,434 2025 48,774 12,902 2026 - 12,902 2027 and beyond - 13,978 Total Minimum Future Payments 618,751 73,692 Less: Imputed Interest 22,248 9,388 Present Value of Lease Liabilities $ 596,503 $ 64,304 F- 16 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 NOTE 8 – SHAREHOLDERS’ EQUITY EQUITY INCENTIVE PLAN On April 12, 2022, the Board of Directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan, or the 2022 Plan. The 2022 Plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards collectively, the “Awards.” Awards may be granted under the 2022 Plan to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. The maximum number of shares of common stock initially available for issuance under the 2022 Plan is 233,334 shares of common stock and thereafter an annual increase shall be added as of the first day of the Company’s fiscal year beginning in 2023, equal to the least of (i) 5% of the outstanding common stock on a fully diluted basis as of the end of the Company’s immediately preceding fiscal year, (ii) 33,334 shares, and (iii) a lesser amount as determined by the Board of Directors. The shares of common stock subject to stock awards granted under the 2022 Plan that lapse, terminate, expire prior to exercise, are canceled or are forfeited, shall again become available for issuance under the 2022 Plan. Shares subject to a stock award under the 2022 Plan shall not again be made available for issuance or delivery under the 2022 Plan if such shares are (i) shares tendered by a participant or retained by the Company as full or partial payment to the Company for the exercise or purchase price of an award or (ii) shares used to satisfy tax withholding obligations in connection with an award. Notwithstanding any other provision of the 2022 Plan to the contrary, unless the plan administrator determines otherwise with respect to a particular award, in the event of a change of control, if and to the extent an outstanding award is not converted, assumed, substituted for or replaced by the successor company, then such award will terminate upon effectiveness of the change of control. Prior to the change of control, the plan administrator may approve accelerated vesting and/or lapse of forfeiture or repurchase restrictions with respect to all or a portion of the unvested portions of such awards, any such determinations to be made by the plan administrator in its sole discretion. A change in control includes: ● certain acquisitions of beneficial ownership of more than 50% of our total voting power; ● a change in the composition of the board of directors during any two-year period such that the individuals who, as of the beginning of such two-year period, constitute the board of directors cease for any reason to constitute at least a majority of the board, as defined in the 2022 Plan; and ● the consummation of a company transaction, as defined in the 2022 Plan. The Board of Directors may amend, suspend or terminate the 2022 Plan or a portion of it at any time; however, to the extent required by applicable law, regulation or stock exchange rule, stockholder approval shall be required for any amendment to the 2022 Plan. The 2022 Plan is scheduled to terminate automatically in ten (10) years following the earlier of (a) the date the Board of Directors adopted the 2022 Plan and (b) the date the stockholders approved the 2022 Plan. COMMON STOCK OPTIONS During the years ended March 31, 2023 and 2022 the Company issued the following stock options: Fiscal 2023: During the fiscal year ended March 31, 2023, the Company issued 667 , 4,000 and 1,334 stock options, respectively, under the 2022 Plan at an exercise price of $ 2.35 , $ 8.11 and $ 7.40 per share, respectively, to directors as compensation for their service. During the fiscal year ended March 31, 2023 the Company issued 33,334 and 3,667 stock options, respectively, from the 2022 Plan at an exercise price of $ 4.00 per share and $ 8.65 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 and compensation related to their Fiscal 2022 annual incentive plan. On June 28, 2022 and August 16, 2022, the Company issued 61,750 and 3,000 stock options, respectively, 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 and $ 8.65 per share, respectively. Fiscal 2022: On August 23, 2021, the Company issued 1,334 Board approved stock options to two members of our Board of Directors at an exercise price of $ 8.70 per share pursuant to our annual director compensation plan for the fiscal year ended March 31, 2022. On December 1, 2021, the Company issued 667 Board approved stock options to a new member of our Board of Directors at an exercise price of $ 8.10 per share pursuant to our annual director compensation plan for the fiscal year ended March 31, 2022. On December 22, 2021 the Company issued 1,667 Board approved stock options to our Chief Revenue Officer at an exercise price of $ 8.10 per share pursuant to his compensation plan for the fiscal year ended March 31, 2021. F- 17 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 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 fiscal year ended March 31, 2023: expected dividend yield of 0 %, risk-free interest rate between 2.63 % and 3.21 %, respectively with volatility between 166.1 % and 196.3 % respectively with an expected term of three years . ● For the fiscal year ended March 31, 2022: expected dividend yield of 0 %, risk-free interest rate between 0.43 % and 0.96 %, respectively with volatility between 149.5 % and 157.0 % respectively with an expected term of three years . A summary of stock option activity for each of the years presented is summarized below. SUMMARY OF STOCK OPTION ACTIVITY Fiscal 2023 Fiscal 2022 Number of Options Weighted Average Exercise Price Weighted Average Contractual Life Number of Options Weighted Average Exercise Price Weighted Average Contractual Life Stock Options: Balance at beginning of year 56,343 $ 9.90 4.1 56,010 $ 9.60 5.4 Granted 107,752 $ 6.83 - 3,667 $ 7.80 Exercised - $ - - ( 2,667 ) $ 5.40 Forfeited ( 2,668 ) $ 5.63 - ( 667 ) $ 3.60 Balance at end of year * 161,427 $ 7.90 6.6 56,343 $ 9.90 4.1 Options exercisable at end of year 53,675 $ 9.90 52,667 $ 9.90 The following table summarizes information about employee stock options outstanding at March 31, 2023: SCHEDULE OF EMPLOYEE STOCK OPTIONS OUTSTANDING Range of Exercise Price Number Outstanding at March 31, 2023 Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number Exercisable at March 31, 2023 Weighted Average Exercise Price $ 2.35 . - $ 7.20 58,669 3.9 $ 5.00 23,334 $ 6.38 $ 8.10 - $ 9.60 81,086 8.7 $ 8.25 8,669 $ 9.00 $ 11.40 - 16.50 21,672 4.0 $ 14.42 21,672 $ 14.42 * 161,427 53,675 * Total number of options outstanding as of March 31, 2023 includes 23,343 options issued to six current and three former directors as compensation, 73,334 options issued to Company officers as compensation and 64,750 options issued to employees as part of an Employee Stock Incentive Plan. As of March 31, 2023, there was unrecognized expense of approximately $ 380,000 remaining on options currently vesting over time with approximately 25 months remaining until these options are fully vested. The vested options as of March 31, 2023 had no intrinsic value. As of March 31, 2023, there were 125,581 shares under the 2022 Plan available to be issued. F- 18 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 WARRANTS As per private placement and public offering as disclosed in Note 10 and Note 11, common warrants and pre-funded warrants issued and outstanding as of March 31, 2023 are as follows: SCHEDULE OF COMMON STOCK WARRANTS ISSUED AND OUTSTANDING Number of Common Warrants Weighted Average Exercise Price Number of Pre-Funded Warrants Weighted Average Exercise Price Warrants: Warrants outstanding at April 1, 2022 1,155,557 $ 2.80 561,113 $ 0.30 Warrants issued 100,000 $ 5.00 - - Warrants exercised ( 353,444 ) $ 2.80 ( 561,113 ) $ 0.30 Warrants outstanding at March 31, 2023 902,113 $ 3.04 - N/A Warrants exercisable at March 31, 2023 902,113 $ 3.04 - N/A As of March 31, 2023, the Company’s warrants by expiration date were as follows: SCHEDULE OF WARRANTS EXPIRATION Number of CommonWarrants Exercise Price Expiration Date 802,113 $ 2.80 September 15, 2026 100,000 $ 5.00 May 23, 2027 902,113 * Effective with the opening of trading on the Nasdaq Stock Market on May 24, 2022, the exercise price of certain warrants issued by the Company pursuant to the terms of that certain Securities Purchase Agreement dated August 5, 2021, was adjusted so that the exercise price is $ 2.80 . The warrants are not subject to further adjustment except for customary adjustments for stock dividends and splits, subsequent rights offerings, pro-rata distributions and fundamental transactions, as set forth in the warrants. COMMON STOCK ISSUANCES During the years ended March 31, 2023 and 2022 the Company issued the following common stock shares: Fiscal 2023: On June 28, 2022 the Company issued 2,468 shares of its common stock to four members of our Board of Directors at $ 8.11 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2023. On August 19, 2022 the Company issued 10,000 shares of its common stock to investor relations firms at $ 9.37 per share pursuant to a vendor agreement for investor relation services performed. On August 19, 2022 the Company issued 3,335 shares of its common stock to the Company’s officers at $ 9.37 per share to pursuant an incentive bonus compensation agreement relating to the Company’s Fiscal 2022 performance. Fiscal 2022: On May 17, 2021 the Company issued 667 shares of its common stock to a former member of the Board of Directors who exercised stock options at an average exercise price of $ 7.20 per share. On August 20, 2021 the Company issued 575 shares of its common stock to our Board of Directors at $ 8.70 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2022. On December 31, 2021 the Company issued 2,000 shares of its common stock to a member of the Board of Directors who exercised stock options at an average exercise price of $ 4.50 per share. NOTE 9 – AUGUST 2021 STOCK REDEMPTION On August 5, 2021, the Company entered into the Redemption Agreement with koncepts and Treasure Green, pursuant to which the Company redeemed 654,105 shares of common stock of the Company. The closing of the transaction set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred back to the Company in consideration of a payment by the Company of approximately $ 7.2 million to koncepts and Treasure Green. The Redeemed Shares were retired and returned to the unissued authorized capital of the Company. Pursuant to the Redemption Agreement, neither koncepts nor Treasure Green remained stockholders of the Company. F- 19 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 NOTE 10 – AUGUST 2021 PRIVATE PLACEMENT On August 5, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional investors and the strategic investor for private placement of (i) 550,000 shares of its common stock (the “Shares”) together with Common Warrants to purchase up to 550,000 shares of common stock with an exercise price of $ 10.50 per share, and (ii) 561,111 pre-funded warrants (“Pre-Funded Warrants”) with each Pre-Funded Warrant exercisable for one share of common stock at an exercise price of $ 0.01 per share, together with Common Warrants to purchase up to 561,111 shares of common stock at an exercise price of $ 10.50 per share (the “Private Placement”). The Common Warrants and Pre-Funded Warrants are collectively referred to as (the “Warrants”). The Warrants are exercisable at any time at the option of the holder, have a term of 5 years from the issuance date and provide for cashless exercise under certain conditions. The Company determined that the Warrants meet the conditions for equity classification. Shares issuable upon exercise of the Warrants are hereinafter referred to as the “Warrant Shares”. The exercise price and number of the Warrant Shares are subject to anti-dilution and other adjustments for certain stock dividends, stock splits, subsequent rights offerings, pro rata distributions or certain equity structure changes. Pursuant to the terms of the Purchase Agreement, on September 3, 2021, the Company filed a registration statement providing for the resale by the purchasers of the Shares and Warrant Shares sold in the Private Placement, which registration statement became effective on September 15, 2021. Additionally, under the terms of the Purchase Agreement, the Company was obligated to use its reasonable best efforts to submit an application to have the Company’s common stock listed on a national exchange by December 31, 2021, and to use its reasonable best efforts to have the Shares and Warrant Shares listed on such national exchange as soon as practicable following the submission of such application. As indicated, the Common Stock was approved to list on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq Capital Market on May 24, 2022. 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 $ 9.8 million, were received by the Company. Approximately $ 7.2 million of the funds was used to execute the Redemption Agreement (See Note 9 – August 2021 Stock Redemption). Stingray Group Inc. (“Stingray” or the “strategic investor”), a leading music, media and technology is part of the group of investors who participated in the Private Placement and have acquired a minority interest in the Company. Stingray is a long-standing business partner with the Company that provides our customers with music content from their extensive library of expertly produced and licensed karaoke content and is now a related party (see Note 15- Related Party Transactions). In connection with the Private Placement, on July 6, 2021, the Company entered into a Placement Agency Agreement with A.G.P./Alliance Global Partners (“AGP”), which provided for AGP to serve as the exclusive placement agent, advisor or underwriter (the “placement agent services”). Pursuant to the Placement Agency Agreement, upon closing of the Private Placement, the Company paid AGP placement fees of $ 0.6 million (representing 7% of the gross proceeds raised in the Private Placement excluding proceeds raised from the strategic investor, plus 3.5% of the aggregate gross proceeds raised from the strategic investor), and issued AGP warrants to purchase 44,445 shares of the Company’s common stock (the “Advisor Warrants”) (representing 5 % of the aggregate number of Shares and Pre-Funded Warrants sold in the Private Placement, excluding the Shares sold to the strategic investor). The Advisor Warrants have the same exercise price ($ 10.50 ) and terms as the Common Warrants issued in the Private Placement. The Company estimated the fair value of the Advisor Warrants to be approximately $ 0.4 million using the Black-Scholes Model based on the following input assumptions: common stock price of $ 9.90 , expected life of the warrants of 2.5 years; stock price volatility of 168 %; dividend yield of 0 %; and the risk-free interest rate of 2.65 %. In addition to the placement fees paid to AGP, the Company incurred additional offering costs for direct incremental legal, consulting, accounting and filing fees related to the Private Placement of approximately $ 0.4 million, of which one consultant was issued 1,905 shares of restricted common stock with an aggregate fair value of approximately $ 0.2 million and a cash payment of $ 0.1 million. Total offering costs related to the Private Placement amounted approximately $ 0.8 million 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 shareholders’ equity. NOTE 11 – PUBLIC OFFERING AND NASDAQ UPLISTING 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 $ 4.0 million prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $ 0.6 million. 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 $ 3.4 million which was used for working capital. F- 20 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 Pursuant to the terms of the Underwriting Agreement, the Company agreed to issue to the Underwriter warrants to purchase up to 100,000 shares of Common Stock representing 10.0 % of the Shares sold in this offering, excluding any Shares sold through the over-allotment option. The warrants are exercisable six months from the commencement of sales under the offering, have an exercise price of $ 5.00 per share and expire five years from the date of issuance. The 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 12 – AT-THE MARKET PUBLIC OFFERING On February 15, 2023, we entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Aegis Capital Corp, as sales agent (the “Agent”), pursuant to which we could offer and sell, from time to time, through the Agent (the “ATM Offering”), up to approximately $ 1.8 million in shares of its common stock. Shares offered and sold in the ATM Offering were issued pursuant to the registration statement on Form S-3 (File No. 333-269183) filed with the Securities and Exchange Commission (the “SEC”) on January 11, 2023 and declared effective by the SEC on January 20, 2023, and the prospectus supplement relating to the ATM Offering filed with the SEC on February 15, 2023. During the fiscal year ended March 31, 2023, we received total net proceeds from the ATM Offering of approximately $ 36,000 on sales of 14,230 shares of common stock at an average price of $ 2.56 per share. Through May 12, 2023, we received total net proceeds from the ATM Offering of approximately $ 1.7 million on sales of 1,052,770 shares of common stock at an average price of $ 1.64 per share. The Sales Agreement has been terminated. NOTE 13 - INCOME TAXES The Company files separate tax returns in the United States and in Macau. The Macau Subsidiary has received approval from the Macau government to operate its business as a Macau Offshore Company (MOC), and was exempt from the Macau income tax for the fiscal year ended March 31, 2022. For the fiscal years ended March 31, 2023 and 2022, the Macau Subsidiary recorded a tax provision of approximately $ 34,000 and $ 0 , respectively. The U.S. Federal net operating loss carryforward is subject to an IRS Section 382 limitation. As of March 31, 2023 and 2022, the Company had net deferred assets of $ 0.0 million and $ 0.9 million, respectively. For the fiscal ended March 31, 2023 we determined our effective tax rate to be approximately ( 28.6 %) and we recorded a tax provision of approximately $ 1.0 million which included a full valuation allowance of approximately $ 2.1 million for deferred tax assets that will more likely than not, expire prior to being realized. For the fiscal year ended March 31, 2022, the Company determined its effective tax rate to be approximately 20.0 % and the Company recorded a tax provision of approximately $ 0.1 million, which was net of a valuation reserve of approximately $ 78,000 for deferred tax assets that will most likely expire prior to being realized. The Company also recorded an income tax receivable of approximately $ 13,000 due to the availability of net operating loss carrybacks and alternative minimum tax credits that were realized for the year ended March 31, 2022. The income tax receivable was included as a component of prepaid expenses and other current assets on the accompanying consolidated balance sheet as of March 31, 2022. The income tax provision (benefit) for federal, foreign, and state income taxes in the consolidated statements of operations consisted of the following components for 2023 and 2022: SCHEDULE OF PROVISION FOR INCOME TAXES 2023 2022 Income tax (benefit) provision: Current: Federal $ 108,756 $ 62,699 State - - Other ( 5,231 ) Macau 34,390 - Total current Federal and State tax $ 137,915 $ 62,699 Deferred: Federal $ 686,357 $ ( 59,434 ) State 206,202 54,039 Total Deferred Federal and State 892,559 ( 5,395 ) Total income tax provision $ 1,030,474 $ 57,304 F- 21 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 The United States and foreign components of income (loss) before income taxes are as follows: SCHEDULE OF INCOME LOSS BEFORE INCOME TAX 2023 2022 United States $ ( 3,526,258 ) $ ( 260,911 ) Foreign ( 81,730 ) 548,686 Total $ ( 3,607,988 ) $ 287,775 The actual tax provision differs from the “expected” tax for the years ended March 31, 2023 and 2022 (computed by applying the U.S. Federal Corporate tax rate of 21 percent to income before taxes) as follows: SCHEDULE OF TAX PROVISION 2023 2022 Expected tax (benefit) provision $ ( 757,640 ) $ 60,324 State income taxes, net of Federal income tax provision ( 174,179 ) 13,816 Permanent differences 13,445 10,290 Permanent difference in ERC income ( 98,814 ) - Tax rate differential on foreign earnings 21,109 ( 83,954 ) Change in valuation allowance 2,026,133 55,375 Other 420 1,453 Tax provision $ 1,030,474 $ 57,304 The tax effects of temporary differences that give rise to significant portions of deferred tax assets and (liabilities) are as follows: SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES 2023 2022 NOL Federal Carryforward $ 867,443 $ 238,955 State NOL Carryforward 341,237 181,943 Inventory differences to Inventory valuation 623,021 415,404 Stock option compensation expense 183,732 117,159 Right of use liabilty 118,227 - Business interest limitation 138,335 62,801 Allowance for doubtful accounts 42,871 31,619 Reserve for estimated returns 89,070 79,109 Accrued vacation 13,786 10,143 Total 2,417,722 1,137,133 Less: valuation allowance ( 2,104,157 ) ( 78,024 ) Net deferred tax asset 313,565 1,059,109 Depreciable and amortizable assets ( 133,630 ) ( 117,595 ) Right of use asset ( 111,216 ) Prepaid expenses ( 68,719 ) ( 48,955 ) Net deferred tax liability ( 313,565 ) ( 166,550 ) Total $ - $ 892,559 The Company performed an analysis in accordance with the provisions of ASC 740, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. The analysis performed to assess the realizability of the deferred tax assets included an evaluation of the pattern and timing of the reversals of temporary differences and the length of carryback and carryforward periods available under the applicable federal and state laws; and the amount and timing of future taxable income. On March 31, 2023, the Company evaluated the realizability of its deferred tax assets in accordance with accounting principles generally accepted in the United States of America and concluded that a valuation allowance of approximately $ 2.1 million against deferred tax assets was necessary. The recognition of the remaining net deferred tax asset and corresponding tax benefit is based upon the Company’s conclusions regarding, among other considerations, the Company’s history of earnings, cumulative net loss during the past three years and projected earnings for fiscal year 2024 and in the future. F- 22 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 At March 31, 2022, the Company has federal tax net operating loss carryforwards in the amount of approximately $ 1.1 million that begin to expire in the year 2025. The net operating loss carryforward is subject to an IRS Section 382 limitation that limited the amount available to use beginning in Fiscal 2020 to approximately $ 0.15 million per year. In addition, the Company has state tax net operating loss carryforwards of approximately $ 3.4 million that will begin to expire beginning in 2024. These tax net operating loss carryforwards may be subject to adjustment based on future changes in ownership. NOTE 14 - SEGMENT INFORMATION The Company operates in one segment. Sales by geographic region for the period presented are as follows: SCHEDULE OF REVENUE BY GEOGRAPHICAL REGION March 31, 2023 March 31, 2022 FOR THE FISCAL YEARS ENDED March 31, 2023 March 31, 2022 North America $ 38,300,000 $ 46,400,000 Australia 700,000 700,000 United Kingdom 300,000 200,000 Europe - 100,000 Others - 100,000 Net sales $ 39,300,000 $ 47,500,000 The geographic area of sales is based primarily on where the product was delivered. NOTE 15 - EMPLOYEE BENEFIT PLANS The Company has a 401(k) plan for its employees to which the Company makes contributions at rates dependent on the level of each employee’s contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to operations for contributions to this plan and administrative costs during the fiscal years ended March 31, 2023 and 2022 totaled approximately $ 74,000 and $ 70,000 , respectively. The amounts are included as a component of general and administrative expense in the accompanying consolidated statements of operations. The Company does not provide any post-employment benefits to retirees. NOTE 16 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, AND SUPPLIERS The Company derives a majority of its revenues from retailers in the United States. The Company’s allowance for doubtful accounts is based upon management’s estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers. At March 31, 2023, 79 % 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. Revenues derived from our top three customers in 2023 and 2022 were 69 % and 72 % of total revenue, respectively. Revenues from customers representing greater than 10 % of total net sales were derived from top two customers in Fiscal 2023 and top three customers in Fiscal 2022 as percentage of the net sales were 48 % and 21 % and 37 %, 18 %, and 17 %, respectively. The loss of any of these customers could have an adverse impact on the Company. The Macau and Hong Kong subsidiaries recorded net sales of approximately $ 1.0 million and $ 3.4 million in fiscal 2023 and 2022, respectively. The Company is dependent upon foreign companies for the manufacture of all its electronic products. The Company’s arrangements with manufacturers are subject to the risk of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors, which could have an adverse impact on its business. The Company believes that the loss of any one or more of their suppliers would not have a long-term material adverse effect because other manufacturers with whom the Company does business would be able to increase production to fulfill their requirements. However, the loss of certain suppliers in the short-term could adversely affect business until alternative supply arrangements are secured. F- 23 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 and 2022 During fiscal years 2023 and 2022, manufacturers in the People’s Republic of China accounted for 100 % of the Company’s total product purchases, including all of the Company’s hardware purchases. In 2018 the U.S. government-imposed tariffs of up to 25% on certain goods imported from China. All of our products are manufactured and imported from China however, only our microphones are currently subject to a 7.5% tariff currently in place . Should the government decide to expand its list of products to include our karaoke products that would subject our products to tariffs in the future, there could be a significant increase in the landed cost of our products. If we are unable to mitigate these increased costs through price increases, we could experience reductions in revenues, gross profit margin and results from operations. NOTE 17 – RELATED PARTY TRANSACTIONS DUE TO/FROM RELATED PARTIES During our fiscal year ended March 31, 2023 and 2022, the Company did business with Stingray who is part of a group of investors who participated in the Private Placement and have acquired a minority interest in the Company (see Note 10 – August 2021 Private Placement). On both March 31, 2023 and 2022, the Company had approximately $ 0.2 million due from Stingray for music subscription reimbursement. TRADE The Company has a music subscription sharing agreement with Stingray. For the fiscal years ended March 31, 2023 and 2022 the Company received music subscription revenue of approximately $ 0.7 million and $ 0.5 million, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of operations. NOTE 18 – RESERVE FOR SALES RETURNS A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are either allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months) or granted a “defective allowance” consisting of a fixed percentage (between 1% and 5%) off of invoice price in lieu of returning defective products. The Company does make exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates. The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the consolidated balance sheets. Changes in the Company’s reserve for sales returns are presented in the following table: SCHEDULE OF RESERVE FOR SALES RETURNS Fiscal Year Ended March 31, 2023 March 31, 2022 Reserve for sales returns at beginning of the fiscal year $ 990,000 $ 960,000 Provision for estimated sales returns 5,147,000 3,643,000 Sales returns received ( 5,237,000 ) ( 3,613,000 ) Reserve for sales returns at end of the year $ 900,000 $ 990,000 NOTE 19 – DAMAGED GOODS INCIDENT RECOVERY For the fiscal years ended March 31, 2023 and 2022 we recognized a gain of approximately $ 49,000 and $ 339,000 as other income on the accompanying consolidated statements of operations due to settlement of accounts payable by a manufacturer’s representative of a factory that caused a damaged goods incident in Fiscal 2020. NOTE 20 – RESERVES Asset reserves and allowances for years ended March 31, 2023 and 2022 are presented in the following table: SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Reduction to Credited to Balance at Beginning of Costs and Allowance for Costs and End of Description Year Expenses Write off Expenses Year Year ended March 31, 2023 Reserves deducted from assets to which they apply: Allowance for doubtful accounts $ 122,550 $ 160,268 $ ( 116,832 ) $ - $ 165,986 Inventory reserve $ 364,447 $ 1,630,553 $ ( 1,095,000 ) $ - $ 900,000 Year ended March 31, 2022 Reserves deducted from assets to which they apply: Allowance for doubtful accounts $ 138,580 $ ( 5,086 ) $ ( 10,944 ) $ - $ 122,550 Inventory reserve $ 636,339 $ 351,661 $ ( 623,553 ) $ - $ 364,447 F- 24