What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-20 compared with 2023-08-18 · 192 added, 286 removed, 16 unchanged (97% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING

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

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

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

in this quarterly report.

This document contains certain forward-looking statements including, among others, anticipated trends in our

financial condition and results of operations and our business strategy.

(See Part II, Item 1A, “Risk Factors “).

These forward-looking

statements are based largely on our current expectations and are subject to a number of risks and uncertainties.

Actual results could

differ materially from these forward-looking statements.

included in this quarterly report that do not relate to present or historical conditions are called “forward-looking statements.”

Such forward-looking statements involve known and unknown risks and uncertainties and other factors that could cause actual results or

outcomes to differ materially from those expressed in, or implied by, the forward-looking statements.

Forward-looking statements may

include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions.

Words such as “believes,”

“forecasts,” “intends,” “possible,” “estimates,” “anticipates,” “expects,”

“plans,” “should,” “could,” “will,” and similar expressions are intended to identify

Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties.

Words such as “anticipates,”

“expects,” “intends,” “goals,” “plans,” “believes,” “seeks,”

“estimates,” “continues,” “may,” “will,” “would,” “should,” “could,”

and variations of such words and similar expressions are intended to identify such forward-looking statements.

In addition, any statements

that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events

or assumptions, and other characterizations of future events or circumstances are forward-looking statements.

Such statements are based

on management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual

results to differ materially from those expressed or implied in our forward-looking statements.

Such risks and uncertainties include

those described throughout this report and our Annual Report on Form 10-K for the year ended March 31, 2023, particularly the “Risk

Factors” sections of such reports.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such

forward-looking statements.

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:

(i) changes in external factors or

in our internal budgeting process which might impact trends in our results of operations;

(ii) unanticipated working capital or other

cash requirements;

(iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the

industries in which we operate;

and (iv) the effects of adverse general economic conditions, both within the United States and globally,

(v) vendor price increases and decreased margins due to competitive pricing during the economic downturn (vi)various competitive market

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 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

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

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.

SMC-Music, Inc.

(“SMCM”) and SMC (HK) Limited (“SMH”), are primarily engaged in the development, marketing, and

sale of consumer karaoke audio equipment, accessories and musical recordings.

The products are sold directly to distributors and retail

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

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

and specialty stores.

Representative

customers include Amazon, Best Buy, BJ’s Wholesale, Costco, Sam’s Club, Target, and Wal-Mart.

Our business has historically

been subject to seasonal fluctuations causing our revenues to vary from quarter to quarter and between the same periods in different

fiscal years.

Our products are manufactured for the most part based on the purchase indications of our customers.

We are uncertain of

how significantly our business would be harmed by a prolonged economic recession, but we anticipate that continued contraction of consumer

spending would negatively affect our revenues and profit margins.

of consumer electronics and toy products in the retail channel are highly seasonal, with a majority of retail sales occurring during

the period from September through December in anticipation of the holiday season, which includes Christmas.

A substantial majority of

our sales occur during the second quarter ending September 30 and the third quarter ending December 31.

Sales in our second and third

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

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.

Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in

other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may

affect our business.

The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers,

acquisitions, or other business combinations that had not been completed as of the date of filing of this Quarterly Report on Form 10-Q.

In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly

disclaim any duty to update such statements, whether as a result of new information, new developments or otherwise, except to the extent

that disclosure may be required by law.

should read the following management’s discussion and analysis of financial condition and results of operations in conjunction

with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report

on Form 10-Q and with our audited financial statements and related notes thereto and Management’s Discussion and Analysis of Financial

Condition and Results of Operations included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”)

on July 14, 2023.

this Quarterly Report, unless the context requires otherwise, references to the “Company,” “Singing Machine,”

“we,” “our company” and “us” refer to The Singing Machine Company, Inc., a Delaware corporation,

as well as our wholly owned subsidiaries;

“SMCL” refers to SMC Logistics, Inc., a California corporation, “SMCM”

refers to SMC-Music, Inc., a Florida corporation, “SMH” refers to SMC (HK) Limited, a Hong Kong company, and “MICS

NY” refers to MICS Nomad, LLC, a Delaware limited liability company.

Singing Machine Company, Inc., a Delaware corporation (the “Company” or “The Singing Machine”) is a consumer

electronics manufacturer of retail karaoke products.

Based in Fort Lauderdale, Florida, and founded over forty years ago, the Company

is primarily engaged in the development, marketing, and sale of a wide assortment of at-home and in-car consumer karaoke audio equipment,

accessories, musical recordings and products.

The Company’s portfolio is marketed under both proprietary brands and licenses, including

Carpool Karaoke and Sesame Street.

The Company’s products are sold in locations worldwide, primarily through mass merchandisers

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

music and record stores, and specialty stores.

Singing Machine’s operations include its wholly owned subsidiaries, SMC Logistics, Inc., a California corporation (“SMCL”),

SMC-Music, Inc., a Florida corporation (“SMCM”), SMC (HK) Limited, a Hong Kong company (“SMH”), MICS Hospitality

Holdings, Inc., a Delaware corporation (“MICS Hospitality”), MICS Hospitality Management, LLC, a Delaware limited liability

company (“MICS Hospitality Management”) and MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”).

Private Placement

On November 20, 2023, the Company the

Company entered into an agreement to sell $2,000,000 in common stock through a private placement of common stock (the “Private

The Private Placement was completed with two Affiliates, (Stingray Group, Inc.

Foreman), both of which were existing shareholders with Board representation.

The Private Placement was completed at $0.91 per share

of common stock, with a total of approximately 2,199,000 shares issued.

Net proceeds from the transaction were approximately

$1,900,000, net of transaction fees of approximately $100,000.

During the six-month period after the closing date, the purchasers

may make a written request for registration under the Securities Act of all or any portion of the shares purchased.

of Debt agreement

On November 17, 2023, the Company

voluntarily terminated the asset-backed credit facility with Fifth Third Bank as the Company could not comply with the debt coverage

financial covenant effective September 30, 2023.

Change in Fiscal Year.

September 22, 2023, the Board of Directors approved a change in the fiscal year end of the Company from March 31st to December 31st.

Following such change, the date of the Company’s next fiscal year end is December 31, 2023 upon filing of our transition report.

Consequently, the Company intends to file a transition report on Form 10-K for the period from April 1, 2023 to December 31, 2023.

August 23, 2023, MICS NY entered into an Agreement of Lease (the “Lease Agreement”) with OAC 111 Flatiron, LLC and OAC Adelphi,

LLC (the “Landlord”), pursuant to which MICS NY agreed to lease approximately 10,000 square feet of ground floor retail space

and a portion of the basement underneath the ground floor retail space in the property located at 111 West 24 th Street, New

York, New York (the “Premises”).

MICS NY intends to use the Premises as a new karaoke venue, offering immersive karaoke technology

and audio-visual capabilities, with restaurant and bar offerings.

term of the Lease Agreement is for fifteen (15) years, or on such earlier date upon which the term shall expire, be canceled or terminated

pursuant to any of the conditions or covenants of the Lease Agreement.

Pursuant to the Lease Agreement, MICS NY is obligated to pay an

initial base rent in the amount of $30,000 beginning August 1, 2024, with scheduled increases over the term, as set forth in the Lease

of New Subsidiaries

July 23, 2023, the Company formed three new subsidiaries:

MICS Hospitality Holdings, Inc., a Delaware corporation, MICS Hospitality Management,

LLC, a Delaware limited liability company, and MICS Nomad, LLC, a Delaware limited liability company, all of which were formed to support

and operate the new hospitality business segment.

February 15, 2023, 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 could offer and sell, from time to time, through

the Agent (the “ATM Offering”), up to approximately $1.8 million in shares of the Company’s common stock.

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

The ATM Offering closed on May 12, 2023.

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 months ended June 30, 2023 and 2022:

June 30, 2023

June 30, 2022

of net sales as follows:

For Three Months Ended

For Six Months Ended

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

Cost of Goods Sold

4 unchanged sentences

Total Operating Expenses

(Loss) Income from Operations

Other Expenses

Income (Loss) from Operations

Other Income (Expenses)

Gain on disposal of fixed assets

Interest expense

Finance costs

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

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.

Total Other (Expenses) Income, net

Income (Loss) Before Income Tax Benefit

Income (Provision) Benefit

Net Income (Loss)

Ended September 30, 2023 Compared to the Quarter Ended September 30, 2022

sales for the three months ended September 30, 2023 decreased to approximately $15,931,000, from approximately $17,114,000 representing

a decrease of approximately $1,183,000 (6.9%) as compared to the three months ended September 30, 2022.

The decrease in net sales was

primarily due to an estimated $913,000 increase in accrued co-op incentives based on promotional programs planned for the upcoming holiday

profit for the three months ended September 30, 2023 decreased to approximately $3,733,000 from approximately $3,853,000, representing

a decrease of approximately $120,000 as compared to the three months ended September 30, 2022.

There was a decrease in gross profit of

approximately $266,000 primarily due to the decrease in net sales as described above.

This decrease was offset by improved gross margins

from 22.5% to 23.4%, which generated approximately $143,000 in higher gross income than if the prior periods’ margins had remained

The improvement in gross margins was in part due to the introduction of several new products that normally yield higher margins

and reductions in product cost due to significant decreases in inbound freight.

the three months ended September 30, 2023, total operating expenses increased to approximately $3,628,000, compared to approximately

$3,268,000 during the three months ended September 30, 2022.

This represents an increase in total operating expenses of approximately

$360,000 (11.0%) from the three months ended September 30, 2022.

There was an increase in selling expenses of approximately $269,000

during the three months ended September 30, 2023, as compared to the same period in the prior year primarily due to a one-time marketing

promotion event cost of approximately $200,000 that was expensed during the three months ended September 30, 2023.

The remaining increase

was primarily due to an increase in legal and professional expenses related to the launch of the Company’s emerging hospitality

expenses were approximately $8,000 for the three months ended September 30, 2023, as compared to approximately $186,000 in other expenses

for the three months ended September 30, 2022.

There was a reduction in expenses related to lower interest and financing costs of approximately

$134,000 and a gain on sale of warehouse equipment of approximately $44,000 associated with the closing of the California warehouse facility

and disposal of warehouse equipment.

the three months ended September 30, 2023, we did not recognize any income tax provision or benefit as the Company is not

forecasting any taxable income for the current fiscal year.

The Company’s income tax provision for the three months ended

September 30, 2022, was approximately $102,000.

The Company’s income tax expense differs from the expected tax benefit/expense

based on statutory rates primarily due to a full valuation allowance for all of its subsidiaries for the three months ended

September 30, 2023 and the utilization of certain deferred tax assets and credits for the three months ended September 30,

Months Ended September 30, 2023 Compared to the Six Months Ended September 30, 2022

sales for the six months ended September 30, 2023 decreased to approximately $18,556,000, from approximately $28,806,000, representing

a decrease of approximately $10,250,000 (35.6%) as compared to the six months ended September 30, 2022.

The decrease in net sales was

primarily due to an initial product set order for approximately $3,140,000 by our largest customer in the first quarter of fiscal 2022.

This was largely a one-time event that represented 35% of the decrease in gross sales recognized during the six months ended September

The remaining decrease of approximately $5,713,000 was primarily due to change in buying demand from specific customers.

customer was the largest contributing factor to this development, and we believe this was primarily due to a reduction in the total number

of product lines carried by this customer during the 2022 holiday season, as well as a relocation of the majority of the product within

the customer’s retail layout.

We also experienced a decrease in demand from a second customer, which was more than offset by new

demand from a customer in Canada, which has been a rapidly growing new account for us.

All other customer demand levels remained largely

in line with expectations.

profit for the six months ended September 30, 2023 decreased to approximately $4,583,000, from approximately $6,943,000, representing

a decrease of approximately $2,360,000 as compared to the six months ended September 30, 2022.

The decrease in gross profit was primarily

due to the decrease in net sales as discussed in net sales above.

the six months ended September 30, 2023, total operating expenses increased to approximately $6,907,000 compared to approximately $6,211,000

during the six months ended September 30, 2022.

This represents an increase in total operating expenses of approximately $696,000 (11.2%)

from the six months ended September 30, 2022.

The increase in operating expenses is primarily due approximately $575,000 in professional,

legal and rent expenses for the launch of the Company’s emerging hospitality segment during the six months ended September 30,

2023 as compared to the same period in the prior year.

There was also a one-time marketing promotion event cost of approximately $200,000

that was expensed during the six months ended September 30, 2023.

expenses were approximately $37,000 for the six months ended September 30, 2023, as compared to approximately $354,000 in other expenses

for the six months ended September 30, 2022.

There was a reduction in expenses related to lower interest and financing costs of approximately

$272,000 and a gain on sale of warehouse equipment of approximately $44,000 associated with the closing of the California warehouse facility

and disposal of warehouse equipment.

the six months ended September 30, 2023, we did not recognize any income tax provision or benefit as the company is not forecasting

any taxable income for the current fiscal year.

The Company’s income tax provision for the six months ended September 30, 2022,

approximately $97,000.

The Company’s income tax expense differs from the expected tax benefit/expense based on statutory rates

primarily due to full valuation allowance for all of its subsidiaries for the six months ended September 30, 2023 and the utilization

of certain deferred tax assets and credits for the three months ended September 30, 2022.

and Capital Resources

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 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.

Company reported a net loss of approximately $2,362,000 and used cash in operating activities of approximately $1,174,000 for the

six months ended September 30, 2023.

The Company had cash on hand of approximately $3,213,000 as of September 30, 2023.

to this liquidity, the Company also a had positive working capital position (excluding cash) of approximately $5,500,000 as of

September 30, 2023, and no material long or short-term indebtedness other than unsecured accounts payable and accrued

Company believes that its cash on hand, cash received from the Private Placement, working capital (excluding cash), and cash

expected to be generated from its operating forecast will be adequate to meet the Company’s liquidity requirements for at

least twelve months from the date of this report.

While the Company is optimistic that it will be successful in these

efforts to achieve its plan, there can be no assurance that the Company will be successful in doing so.

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

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.

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.

The critical accounting estimates and assumptions

have not materially changed from those identified in our Annual Report for the fiscal year ended March 31, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis