What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-18 compared with 2023-02-21 · 227 added, 256 removed, 75 unchanged (87% of the section changed)

21 unchanged sentences

forward-looking statements.

Our ability to predict or project future results or the effect of events on our operating results is inherently

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be

accurate indications of the times at, or by which, such performance or results will be achieved.

ability to predict or project future results or the effect of events on our operating results is inherently uncertain.

Forward-looking

statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the

times at, or by which, such performance or results will be achieved.

factors to consider in evaluating such forward-looking statements include, but are not limited to:

8 unchanged sentences

factors that may prevent us from competing successfully in the marketplace and (vii) other factors described in the risk factors section

of our Annual Report on Form 10-K, this Quarterly Report on 10-Q, or in our other filings made with the SEC.

of our Annual Report on Form 10-K for our fiscal year ended March 31, 2023, this Quarterly Report on 10-Q, or in our other filings made

with the SEC.

are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the

24 unchanged sentences

quarter, combined, accounted for approximately 62% and 81% of net sales in fiscal 2023 and 2022, respectively.

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

the United States, geopolitical events, health crises such as the COVID-19 pandemic, and other events that trigger economic volatility

on a global or regional basis.

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.

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 sold 1,067,000 shares of common stock through

the ATM Offering at an average price of approximately $1.64 per share for gross proceeds of approximately $1,745,000.

We received net

cash proceeds of approximately $1,690,000 after payment of brokerage commissions and administrative fees to the agent.

The ATM Offering closed

May 12, 2023.

June 13, 2022, Ault Alliance, Inc., Ault Lending, LLC (a subsidiary of Ault Alliance) and Milton C.

Ault III (“Ault”),

Founder and Executive Chairman of Ault Alliance (collectively the “Reporting Persons”) filed a joint Schedule 13D filing

(the “Schedule 13D”) reporting that the Reporting Persons acquired, in the aggregate, 52.8% of the issued and

outstanding shares of common stock at the date of the filing of the Schedule 13D, par value $.01 per share (the “Common

Stock”) of the Company, through open market purchases.

disclosed in the Schedule 13D, as amended, and subsequent Section 16 filings, the Reporting Persons may be deemed to

beneficially own an aggregate of 1,808,000 shares of our common stock, or approximately 42.8% of our outstanding shares of common

stock as of the date of this report.

The reduction in beneficial ownership percentage was a result of us selling share of our common

stock in our ATM Offering, and not from any sales of our common stock by Ault Lending.

May 23, 2022, the “Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital

Corp., who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten public offering pursuant

to which the Company sold to the Underwriter 1,000,000 shares of its common stock for gross proceeds of $4,000,000 prior to deducting

underwriting discounts and commissions and other estimated offering expenses of approximately $637,000.

The price to the public in the

offering was $4.00 per Share, before underwriting discounts and commissions.

The offering closed on May 26, 2022.

The Company received

net proceeds of approximately $3,363,000.

to the terms of the Underwriting Agreement, the Company agreed to issue to the Underwriter warrants to purchase up to 100,000 shares

of common stock representing 10% of the Shares sold in the offering, excluding any shares sold through the over-allotment option.

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%.

of New Directors

April 5, 2023, the size of our Board of Directors was increased to ten and Messrs.

Ault, III and Henry C.

appointed as directors.

In addition, the Board appointed Mr.

Ault to the position of Executive Chairman, an executive officer

position of the Company.

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

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

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

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

In particular, a significant deterioration in economic conditions, including economic slowdowns or recessions, increased unemployment

levels, inflationary pressures or disruptions to credit and capital markets, could lead to decreased consumer confidence and consumer

spending more generally, thus reducing consumer demand for our products.

We are also impacted by our entire supply chain.

While we have

experienced a significant decrease in container costs for inbound containers due to decreased demand in general, we are continuing to

see increases in drayage costs due to cost of fuel increases and other surcharges due to inflation.

The cost of labor, employee benefits,

pallets and warehouse supplies and other logistics related costs continue to increase at record rates.

Such heightened inflationary levels

may negatively impact consumer disposable income and discretionary spending and, in turn, reduce consumer demand for our products and

increase our costs.

In particular, a significant

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

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

reducing consumer demand for our products.

OF OPERATIONS

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

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

Three Months Ended

the Nine Months Ended

of net sales for the three months ended June 30, 2023 and 2022:

June 30, 2023

June 30, 2022

Cost of Goods Sold

1 unchanged sentence

Selling expenses

General and administrative

General and administrative expenses

Depreciation and amortization

1 unchanged sentence

(Loss) Income from Operations

Other (Expenses) Income

Gain - related party

Gain from Payroll Protection

Plan loan forgiveness

Gain from settlement of

accounts payable

Loss from extinguishment

Other Expenses

Interest expense

Finance costs

Total Other (Expenses) Income,

(Loss) Income Before Income

Tax (Benefit) Provision

Income Tax (Benefit) Provision

Net (Loss) Income

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

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

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

We experienced a decrease in net sales to all of our

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

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

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

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

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

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

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

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

Co-op promotion incentives for the three months ended December

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

three months ended December 31, 2021.

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

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

The decrease in net sales as explained in Net Sales

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

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

a decrease of 6.9 margin points.

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

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

of the gross margin decrease.

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

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

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

during the three months ended December 31, 2021.

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

the three months ended December 31, 2022.

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

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

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

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

There was an increase in compensation

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

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

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

other regulatory filings.

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

remaining variance due to net reductions of other variable expenses.

INCOME FROM OPERATIONS

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

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

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

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

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

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

During the three months ended

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

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

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

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

who were former related parties.

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

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

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

(LOSS) INCOME

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

for the three months ended December 31, 2021.

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

Total Other Expenses

Loss Before Income Tax Benefit

Income Tax Benefit

ENDED JUNE 30, 2023 COMPARED TO THE QUARTER ENDED JUNE 30, 2022

sales for the three months ended June 30, 2023 decreased to approximately $2,625,000 from approximately $11,692,000 representing a

decrease of approximately $9,067,000 (77.5%) as compared to the three months ended June 30, 2022.

The significant decrease in net

sales was primarily due to two factors during the quarter ended June 30, 2022, 1) the impact of a large order for initial setup in a

new department from our largest single customer, and 2) accelerated direct import sales by another of our largest

the initial product set in the quarter ended June 30, 2022 was placed by the Company’s largest single customer, which

expanded its commercial relationship with SMC to include its consumer electronics department.

This single order contributed

approximately $3,140,000 to sales in the first three months ended June 30, 2022, which represented 27% of all sales during that

period, and 35% of the difference in sales in the three months ended June 30, 2022 as compared to the same period in

second significant factor for the exceptionally high sales during the three months ended June 30, 2022 was due to one sizable direct import

This direct import order accelerated revenue recognition to the date the customer took receipt of the product in China from our

contract manufacturers, instead of opting to take receipt of the product at the date of shipment from our logistics facility in Ontario,

This accelerated revenue recognition by over two months, shifting sales from the traditional second quarter period to the

first quarter.

The total amount of these two orders was approximately $3,530,000, representing 30.2% of sales for the quarter and 38.9%

of the difference in sales when compared to the three months ended June 30, 2023.

we have seen customers shifting back to the traditional just-in-time buying pattern that was common for many years prior to the COVID

global pandemic.

Historically, the first quarter has represented a low point in our seasonal sales cycle.

To further illustrate this

point, first quarter sales since 2017 have averaged approximately $3,760,000, excluding the first quarter of 2022.

Outside of the 2020-2022

supply distortions due to the pandemic, first quarter sales have not generally exceeded 10% of annual sales.

general, sales for the three months June 30, 2023 were in line or slightly below management’s expectations, with the majority of

the difference due to several customers electing to make final orders slightly later in the calendar year than previously forecast.

profit for the three months ended June 30, 2023 decreased to approximately $848,000 from approximately $3,181,000, representing a decrease

of approximately $2,332,000 as compared to the three months ended June 30, 2022.

The Company improved gross margins from 27.2% to 32.3%, which generated approximately $135,000 in higher gross income than if the prior periods margins had remained unchanged.

The improvement in gross margins was in part due to the significant decrease in direct import sales as a component of sales during the

three months ended June 30, 2023.

Historically, direct import sales carry a 3-5% lower gross margin than sales fulfilled

domestically by SMC.

second significant contributing factor for the improvement in margins was lower shipping and handling costs as the Company continues

to see lower costs for product delivery after an extended period of higher shipping costs during the supply chain constraints resulting

from the global pandemic in 2020 through early 2022.

the three months ended June 30, 2023, total operating expenses increased to approximately $3,280,000 compared to approximately

$3,034,000 during the three months ended June 30, 2022.

This represents an increase in total operating expenses of

approximately $246,000 (8.1%) from the three months ended June 30, 2022.

increase in operating expenses is primarily due to the impact of the Company’s decision to transition to an outsourced

logistics model.

First, there was approximately $60,000 in severance expenses for head count reduction.

Second, there was

approximately $118,000 in various costs incurred with the closure of the Ontario facility, the transportation of the inventory to

the outsourced logistics provider, and the increase in depreciation of approximately $122,000.

the closure of the Ontario facility, the Company also incurred higher accounting and legal expenses due to increased audit and legal

services required to support certain aspects of being a company under common control.

Lastly, the Company spent approximately $100,000

on consulting and legal services for marketing research.

all other selling, general and administrative expenses were flat or decreased during the first three months of fiscal year 2024.

FROM OPERATIONS

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

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

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

We experienced a decrease in net sales to all of our

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

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

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

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

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

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

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

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

Co-op promotion incentives for the nine months ended December

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

the nine months ended December 31, 2021.

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

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

The decrease in net sales as explained in Net Sales above

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

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

increase of 0.6 gross margin points.

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

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

These increases in gross

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

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

of the gross margin decrease.

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

during the nine months ended December 31, 2021.

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

the nine months ended December 31, 2021.

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

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

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

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

There was an increase in legal, professional,

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

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

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

There was an increase in compensation of approximately

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

compensation, new hires as well as merit increases.

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

control and employment continuation agreement with the Chief Financial Officer.

There was an increase in travel expenses of approximately

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

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

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

INCOME FROM OPERATIONS

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

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

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

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

(EXPENSES) INCOME

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

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

During the nine months

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

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

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

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

who were former related parties.

During the nine months ended

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

During the nine months ended December 31, 2021

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

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

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

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

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

(LOSS) INCOME

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

for the same period a year ago.

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

Other (Expense) Income and Income Taxes.

was a loss from operations of approximately $2,431,000 for the three months ended June 30, 2023 compared to income from operations of

approximately $147,000 for the three months ended June 30, 2022.

The decrease in income from operations of approximately $2,578,000 was

primarily due to the decrease in gross profit generated by lower net sales as explained above.

expenses were approximately $29,000 for the three months ended June 30, 2023, as compared to approximately $168,000 in other expenses

for the three months ended June 30, 2022.

All of the reduction in expenses were due to lower interest and financing costs.

the three months ended June 30, 2023, the Company did not recognize any income tax benefit due to a net loss as management determined

it is more likely than not that the Company will not recognize any deferred tax asset generated from the net loss.

the three months ended June 30, 2022, the Company recognized an income tax benefit of approximately $0 and $5,000, respectively, due to

management’s best estimate of the Company’s full year effective tax rate of approximately 24.1%.

the three months ended June 30, 2023, we reported a net loss of approximately $2,460,000 compared to a net loss of approximately $16,000

for the three months ended June 30, 2022.

The increase in the net loss was primarily due to the same reasons discussed in Net Sales and

Operating Expenses.

AND CAPITAL RESOURCES

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

on December 31, 2021.

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

Net cash used in operating activities

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

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

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

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

These increases in net cash used in operating activities

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

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

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

for anticipated overstock returns from one customer.

cash used in operating activities was approximately $3,113,000 for the nine months ended December 31, 2021.

During the nine months ended

December 31, 2021 there was an increase in accounts receivable of approximately $10,124,000 due to a seasonal increase in sales and an

increase in inventories of approximately $5,933,000 due to in-transit and receipt of inventory intended for peak season shipments but

were received too late to ship due to global logistics issues.

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

an increase in in accounts payable and accrued expenses of approximately $4,531,000 due to delayed receipt of seasonal purchases of product

for the peak season due to global logistics issues.

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

as cash collected in excess of amounts due on the revolving credit during the first quarter was used to pay for the seasonal increase

in inventory.

There was a seasonal increase in reserve for sales returns of approximately $1,962,000.

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

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

new products.

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

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

In May 2022, we received

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

summarized in the next two paragraphs.

In addition, during the nine months ended December 31, 2022, we received proceeds of

approximately $1,144,000 from the exercise of pre-funded and common stock warrants.

All proceeds were used for working capital.

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

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

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

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

May 23, 2022, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp.,

who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten public offering (the “Offering”)

pursuant to which the Company sold to the Underwriter 1,000,000 shares (the “Shares”) of common stock, par value $0.01 per

share (the “Common Stock”) for gross proceeds of $4,000,000 prior to deducting underwriting discounts and commissions and

other estimated offering expenses of approximately $637,000.

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

discounts and commissions.

of June 30, 2023, the Company had cash on hand of approximately $1,890,000 as compared to cash on hand of approximately $2,278,000

as of June 30, 2022.

We had working capital of approximately $8,644,000 as of June 30, 2023.

cash used in operating activities was approximately $2,548,000 for the three months ended June 30, 2023.

During the three months

ended June 30, 2023 there was a decrease in accounts receivable of approximately $1,382,000 due to a decrease in sales to one of our

major customers as discussed in net sales above.

This decrease in accounts receivable was offset by an increase in inventory of

approximately $1,100,000 due to products arriving for the upcoming season.

There was a decrease in accrued expenses of approximately

$970,000 and reserves for sales returns of approximately $568,000 primarily related to the settlement of co-op incentives and

credits for sales returns accrued at March 31, 2023 and the significant decrease in net sales requiring less accruals for

co-op incentives and sales returns as of June 30, 2023.

There was an increase in prepaid expenses of approximately $207,000

primarily due to a prepayment of a promotion and marketing campaign for our Carpool Karaoke product.

cash used in operating activities was approximately $4,149,000 for the three months ended June 30, 2022.

During the three months ended

June 30, 2022, there was an increase in accounts receivable of approximately $7,002,000 due to an increase in sales to two major customers

as explained in net sales above.

This increase in net cash used in operating activities was offset by an increase in in accounts payable

and accrued expenses of approximately $1,839,000 primarily due to payment of prior season’s inventory that arrived late due to

global logistics issues.

There was a decrease in inventory of approximately $1,205,000 primarily due to a decrease in-transit inventory

from March 31, 2022 as new product for the initial spring product set at one major customer was shipped during the three months ended

June 30, 2022.

cash used in investing activities for the three months ended June 30, 2023 and 2022 was approximately $43,000 and $22,000, respectively.

investments consisted primarily of purchases of molds and tooling for new products.

cash provided by financing activities for the three months ended June 30, 2023 and 2022 was approximately $1,586,000 and $4,159,000,

respectively.

In both instances, the primary source of cash from financings was the result of an equity capital markets transaction.

In May 2023, we received net proceeds of approximately $1,604,000 through an ATM Offering as discussed below.

were used for working capital and general corporate purposes.

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 $1,800,000 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.

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 $1,604,000 on sales of 1,052,770 shares of common stock at an average price of $1.64 per share.

The ATM Offering

closed May 12, 2023.

May 2022, we received net proceeds of approximately $3,363,000 from a public offering we executed in conjunction with our up-listing

to Nasdaq as discussed below.

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

from the exercise of pre-funded and common stock warrants.

All proceeds were used for working capital and general corporate purposes.

May 23, 2022, the “Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital

Corp., who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten public offering (the “Offering”)

pursuant to which the Company sold to the Underwriter 1,000,000 shares of common stock, par value $0.01 per share gross proceeds of $4,000,000

prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $637,000.

to the public in the Offering was $4.00 per Share, before underwriting discounts and commissions.

The offering closed on May 26, 2022.

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

used for working capital.

May 24, 2022, the Company’s Common Stock was approved to list on the Nasdaq Capital Market under the symbol “MICS”

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

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

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

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

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

The Credit Agreement matures on October 14, 2025.

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

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

administrative expenses.

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

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

ratio covenant.

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

waiver or renegotiate the covenant.

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

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

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

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

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

additional cash through equity offering.

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

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

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

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

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

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

we will be successful in doing so.

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

March 31, 2024.

The Company received net proceeds of approximately $3,363,000 which was used for working capital and general corporate purposes.

Facility - We currently have a three-year revolving Credit Facility with Fifth Third Bank for a $15.0 million facility (decreasing to

$7.5 million in off-peak season) on eligible accounts receivable and inventory which terminates on October 14, 2025.

As of the date of

the filing of this Quarterly Report, there was approximately $1.5 million available to borrow on the revolving Credit Facility.

of March 31, 2023, we were in default under the Credit Agreement due to non-compliance with the fixed charge coverage ratio covenant

On May 19, 2023, we executed a Waiver and First Amendment agreement which provides for a waiver of previous defaults and

new financial covenants.

We 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.

We must also maintain pre-defined minimum operating cash

flows between February and August 2023, until we achieve a fixed charge ratio of 1.15 :

1.0 beginning in September 2023 and throughout

the remaining term of the Credit Agreement.

As of the date of filing this Quarterly Report, we are in compliance with the amended covenants

and there is no outstanding balance on the Credit Facility.

believe that our cash on hand, working capital (net of cash), cash expected to be generated from our operating forecast, along with

the availability of cash from our credit facilities (See Note 7 –FINANCING) will be adequate to meet the Company’s

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

While the Company is optimistic that it will be

successful in these efforts to achieve our plan, there can be no assurance that we will be successful in doing so.

Company has a continued support letter from its largest stockholder, Ault Alliance, through August 31, 2024.

ACCOUNTING POLICIES

Company’s interim financial statements were prepared in accordance with United States generally accepted accounting principles,

which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain.

As the number of variables and assumptions affecting the judgement increases such judgements become even more subjective.

While management

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

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

Company’s interim financial statements were prepared in accordance with United States generally accepted accounting

principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are

inherently uncertain.

As the number of variables and assumptions affecting the judgement increases such judgements become even more

While management believes that its assumptions are reasonable and appropriate, actual results may be materially

different than estimated.

The critical accounting estimates and assumptions have not materially changed from those identified in the

Company’s Annual Report for the fiscal year ended March 31, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Item 2. Management’s Discussion and Analysis