Algorhythm Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS The Singing Machine Company, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2023 March 31, 2023 (unaudited) Assets Current Assets Cash $ 3,212,564 $ 2,894,574 Accounts receivable, net of allowances of $ 243,412 and $ 165,986 , respectively 10,901,701 2,075,086 Due from banks 152,148 - Accounts receivable related parties 164,923 239,078 Accounts receivable 164,923 239,078 Inventories 13,042,627 9,639,992 Prepaid expenses and other current assets 303,342 350,735 Total Current Assets 27,777,305 15,199,465 Property and equipment, net 457,173 633,207 Operating leases - right of use assets 4,002,595 561,185 Other non-current assets 346,239 254,740 Total Assets $ 32,583,312 $ 16,648,597 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 12,526,485 $ 1,769,348 Accrued expenses 2,747,502 2,265,424 Prepaids from customers 1,305,271 583,323 Reserve for sales returns 2,289,251 900,000 Other current liabilities 84,253 98,957 Current portion of operating lease liabilities 112,647 508,515 Total Current Liabilities 19,065,409 6,125,567 Other liabilities, net of current portion 14,844 103,997 Operating lease liabilities, net of current portion 3,825,115 87,988 Total Liabilities 22,905,368 6,317,552 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; 4,220,259 and 3,184,439 shares issued and 4,220,259 and 3,167,489 outstanding, respectively 42,203 31,675 Additional paid-in capital 31,514,831 29,822,205 Subscriptions receivable - ( 5,891 ) Accumulated deficit ( 21,879,090 ) ( 19,516,944 ) Total Shareholders’ Equity 9,677,944 10,331,045 Total Liabilities and Shareholders’ Equity $ 32,583,312 $ 16,648,597 See notes to the condensed consolidated financial statements 3 The Singing Machine Company, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended For the Six Months Ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Net Sales $ 15,930,563 $ 17,113,636 $ 18,555,566 $ 28,805,690 Cost of Goods Sold 12,196,677 13,260,617 13,972,830 21,863,138 Gross Profit 3,733,886 3,853,019 4,582,736 6,942,552 Operating Expenses Selling expenses 1,169,088 899,590 1,614,362 1,504,787 General and administrative expenses 2,458,848 2,368,778 5,293,160 4,706,272 Total Operating Expenses 3,627,936 3,268,368 6,907,522 6,211,059 Income (Loss) from Operations 105,950 584,651 ( 2,324,786 ) 731,493 Other (Expenses) Income Gain on disposal of fixed assets 44,296 - 44,296 - Interest expense ( 52,711 ) ( 185,827 ) ( 81,656 ) ( 353,753 ) Total (Expenses) income, net ( 8,415 ) ( 185,827 ) ( 37,360 ) ( 353,753 ) Income (Loss) Before Income Tax Benefit 97,535 398,824 ( 2,362,146 ) 377,740 Income Tax Benefit - ( 102,357 ) - ( 97,276 ) Net Income (Loss) $ 97,535 $ 296,467 $ ( 2,362,146 ) $ 280,464 Net Income (Loss) per Common Share Basic $ 0.02 $ 0.10 $ ( 0.58 ) $ 0.11 Diluted $ 0.02 $ 0.08 $ ( 0.58 ) $ 0.09 Weighted Average Common and Common Equivalent Shares: Weighted Average Common and Common Equivalent Shares: Basic 4,220,259 3,071,131 4,063,697 2,484,660 Diluted 4,220,259 3,610,188 4,063,697 2,961,631 See notes to the condensed consolidated financial statements 4 The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the three months ended September 30, 2023 and 2022 (Unaudited) Shares Amount in Capital Deficit Total Common Stock Additional Paid Accumulated Shares Amount in Capital Deficit Total Balance at June 30, 2023 4,220,259 $ 42,203 $ 31,478,977 - $ ( 21,976,625 ) $ 9,544,555 Net Income - - - - 97,535 97,535 Stock based compensation - - 35,854 - 35,854 - Balance at September 30, 2023 4,220,259 $ 42,203 $ 31,514,831 - ( 21,879,090 ) $ 9,677,944 Common Stock Additional Paid Accumulated Shares Amount in Capital Deficit Total Balance at June 30, 2022 3,017,700 $ 30,177 $ 29,098,800 - $ ( 14,894,485 ) $ 14,234,492 Net income - - - - 296,467 296,467 Exercise of common stock warrants 77,779 778 217,003 - 217,781 Stock based compensation 13,335 133 195,515 - 195,648 Balance at September 30, 2022 3,108,814 $ 31,088 $ 29,511,318 - $ ( 14,598,018 ) $ 14,944,388 See notes to the condensed consolidated financial statements. 5 The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the six months ended September 30, 2023 and 2022 (Unaudited) Common Stock Additional Paid Subscriptions Accumulated Shares Amount in Capital Receivable Deficit Total Balance at March 31, 2023 3,167,489 $ 31,675 $ 29,822,205 $ ( 5,891 ) $ ( 19,516,944 ) $ 10,331,045 Net Ioss - - - - ( 2,362,146 ) ( 2,362,146 ) Issuance of common stock - at-the-market offering 1,052,770 10,528 1,697,617 - - 1,708,145 Payment of stock offering costs - - ( 104,250 ) - - ( 104,250 ) Stock based compensation - - 99,259 - - 99,259 Collection of subscriptions receivable - - - 5,891 - 5,891 Balance at September 30, 2023 4,220,259 $ 42,203 $ 31,514,831 $ - $ ( 21,879,090 ) $ 9,677,944 Balance at March 31, 2022 1,221,209 $ 12,212 $ 24,902,694 $ - $ ( 14,878,482 ) $ 10,036,424 Balance , value 1,221,209 $ 12,212 $ 24,902,694 $ - $ ( 14,878,482 ) $ 10,036,424 Net income - - - - 280,464 280,464 Net income (loss) - - - - 280,464 280,464 Issuance of common stock 1,000,000 10,000 3,990,000 - - 4,000,000 Payment of stock issuance expenses - - ( 637,250 ) - - ( 637,250 ) Exercise of pre-funded warrants 561,113 5,611 162,723 - - 168,334 Exercise of common stock warrants 309,001 3,090 862,113 - - 865,203 Stock based compensation 15,803 158 231,055 - - 231,213 Rounding of common stock issued due to reverse split 1,688 17 ( 17 ) - - - Balance at September 30, 2022 3,108,814 $ 31,088 $ 29,511,318 $ - $ ( 14,598,018 ) $ 14,944,388 Balance , value 3,108,814 $ 31,088 $ 29,511,318 $ - $ ( 14,598,018 ) $ 14,944,388 See notes to the condensed consolidated financial statements. 6 The Singing Machine Company, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended September 30, 2023 September 30, 2022 Cash flows from operating activities Net (loss) income $ ( 2,362,146 ) $ 280,464 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation 234,448 120,390 Change in inventory reserve 132,386 466,000 Change in allowance for bad debts 77,426 155,403 Gain from disposal of property and equipment ( 44,296 ) - Stock based compensation 99,259 231,213 Amortization of right of use assets 433,086 417,068 Deferred taxes - 80,081 Changes in operating assets and liabilities: Accounts receivable ( 8,904,041 ) ( 8,011,050 ) Due from banks ( 152,148 ) ( 976,166 ) Accounts receivable - related parties 74,155 70,547 Inventories ( 3,535,021 ) ( 2,326,800 ) Prepaid expenses and other current assets 47,393 193,984 Other non-current assets ( 91,499 ) ( 107,400 ) Accounts payable 10,757,137 4,742,478 Accrued expenses 482,078 811,932 Refunds due to customers 721,948 ( 4,043 ) Reserve for sales returns 1,389,251 700,606 Operating lease liabilities ( 533,237 ) ( 424,912 ) Net cash used in operating activities ( 1,173,821 ) ( 3,580,205 ) Cash flows from investing activities Purchase of property and equipment ( 67,978 ) ( 87,801 ) Disposal of property and equipment 53,860 - Net cash used in investing activities ( 14,118 ) ( 87,801 ) Cash flows from financing activities Proceeds from issuance of stock, net of offering costs 1,603,895 3,362,750 Collection of subscriptions receivable 5,891 - Payments on installment notes ( 103,857 ) ( 36,372 ) Proceeds from exercise of common stock warrants - 865,203 Proceeds from exercise of pre-funded warrants - 168,334 Payments on finance leases - ( 3,709 ) Net cash provided by financing activities 1,505,929 4,356,206 Net change in cash 317,990 688,200 Cash at beginning of year 2,894,574 2,290,483 Cash at end of period $ 3,212,564 $ 2,978,683 Supplemental disclosures of cash flow information: Cash paid for interest $ 6,280 $ 331,225 Right of use assets exchanged for lease liabilities $ 3,874,496 $ - See notes to the condensed consolidated financial statements 7 THE SINGING MACHINE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 and 2022 (Unaudited) NOTE 1 – BASIS OF PRESENTATION Overview The 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. The 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”). NOTE 2 - RECENT DEVELOPMENTS 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 Placement”). The Private Placement was completed with two Affiliates, (Stingray Group, Inc. and Jay 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. Hospitality Lease On 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. (See Note 7 - Operating Leases) The 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 Agreement. ATM Offering On 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. The Company received net proceeds of approximately $ 1,690,000 after payment of brokerage commissions and administrative fees to the agent of approximately $ 55,000 . The ATM Offering closed on May 12, 2023. NOTE 3 – LIQUIDITY The 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. In addition 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 expenses. The 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. 8 THE SINGING MACHINE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 and 2022 (Unaudited) NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited financial statements for the six months ended September 30, 2023 and 2022 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete consolidated financial statements. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements information as of September 30, 2023 and the nine months ended September 30, 2023 is unaudited whereas the condensed consolidated balance sheet as of March 31, 2023 is derived from the audited consolidated balance sheet as of that date. The condensed consolidated financial statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10K for the fiscal year ended March 31, 2023. There have been no changes to our significant accounting policies as disclosed on the Company’s annual report on Form 10K for the fiscal year ended March 31, 2023. NOTE 5 - REVENUE The Company disaggregates revenues by product line as most of its revenue is generated by the sales of karaoke hardware and the Company has no other material business segments. Revenue is derived from five different major product lines. Disaggregated revenue from these product lines for the three and six months ended September 30, 2023 and 2022 consisted of the following: SCHEDULE OF DISAGGREGATED REVENUE Three Months Ended Six Months Ended Product Line September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Classic Karaoke Machines $ 7,259,000 $ 9,132,000 $ 8,461,000 $ 14,343,000 Licensed Products 36,000 4,000 43,000 48,000 SMC Kids Toys 297,000 622,000 327,000 1,557,000 Microphones and Accessories 962,000 2,558,000 1,885,000 5,110,000 Streaming Karaoke Machines * 7,377,000 4,798,000 7,840,000 7,748,000 Total Net Sales $ 15,931,000 $ 17,114,000 $ 18,556,000 $ 28,806,000 * Streaming Karaoke Machines -The Streaming Karaoke Machines product line is defined as a karaoke hardware unit that contains built-in technology that gives the user the ability to stream karaoke content directly via WiFi to the karaoke machine without requiring any third-party devices. 9 THE SINGING MACHINE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 and 2022 (Unaudited) Sales by geographic region for the periods presented are as follows: SCHEDULE OF REVENUE BY GEOGRAPHICAL REGION September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Australia $ 263,000 $ 670,000 $ 263,000 $ 670,000 Europe 290,000 306,000 290,000 306,000 North America 15,378,000 16,138,000 18,003,000 27,830,000 Total Net Sales $ 15,931,000 $ 17,114,000 $ 18,556,000 $ 28,806,000 The Company selectively participates in a retailer’s co-op promotion incentives by providing marketing fund allowances to its customers. As these co-op promotion initiatives are not a distinct good or service and the Company cannot reasonably estimate the fair value of the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers are recorded as a reduction to net sales. For the three months ended September 30, 2023 and 2022, co-op promotion incentives were approximately $ 1,637,000 and $ 724,000 , respectively. For the six months ended September 30, 2023 and 2022, co-op promotion incentives were approximately $ 1,728,000 and $ 1,020,000 , respectively. The Company estimates variable consideration under its return allowance programs for goods returned from the customer whereby a revenue return reserve is recorded based on historic return amounts, specific events as identified and management estimates. The Company’s reserve for sales returns as of September 30, 2023 and March 31, 2023 was approximately $ 2,289,000 and $ 900,000 , respectively. In conjunction with the recording of the revenue sales return reserve, the Company estimates the cost of products that are expected to be returned under its return allowance program whereby the estimated cost of product returns is recorded as an asset and is included in inventory on the condensed consolidated balance sheets. The Company’s estimated cost of returns as of September 30, 2023 and March 31, 2023 was approximately $ 840,000 and $ 555,000 , respectively. A return program for defective goods is negotiated with each of the Company’s wholesale customers on a year-to-year basis. Customers are allowed to return defective goods within a specified period of time after shipment (between six and nine months). The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates. The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the condensed consolidated balance sheets. NOTE 6 – FINANCING Asset-backed Revolving Credit Facility On October 14, 2022, the Company entered into a Loan and Security Agreement with Fifth Third Financial Corporation (the “Credit Agreement”), 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 established a secured asset-backed revolving credit facility which is comprised of a maximum $ 15 million revolving credit facility (“Credit Facility”). The Credit Facility was terminated on November 17, 2023 . Availability under the Credit Facility was determined monthly by a borrowing base comprised of a percentage of eligible accounts receivable and eligible inventory of the Borrowers. The Company’s obligations under the Credit Agreement are secured by a continuing security interest in all property of each Loan Party, subject to certain excluded collateral (as defined in the Credit Agreement). 10 THE SINGING MACHINE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 and 2022 (Unaudited) Costs associated with closing of the Credit Agreement of approximately $ 254,000 were deferred and are being amortized over life of the loan. During the three months ended September 30, 2023 and 2022, the Company incurred amortization expense of approximately $ 21,000 and $ 0 , respectively associated with the amortization of deferred financing costs from the Credit Agreement. During the six months ended September 30, 2023 and 2022, the Company incurred amortization expense of approximately $ 42,000 and $ 8,000 , respectively, associated with the amortization of deferred financing costs from the Credit Agreement. Borrowings under the Credit Facility took the form of base rate loans at interest rates of the greater of either (a) the Prime Rate plus 0.50% or (b) the Secured Overnight Financing Rate (“SOFR”) 30-day term rate plus 3%, subject to a minimum of 0.050% in either case. For the three months ended September 30, 2023 and 2022, the Company incurred interest expense of approximately $ 22,000 and $ 0 , respectively. For the six months ended September 30, 2023 and 2022, the Company incurred interest expense of approximately $ 42,000 and 8,000 , respectively. The Credit agreement included certain covenants which included, but were not limited to restrictions on debt, asset liens, capital expenditures, formation of new entities and financial covenants. As of March 31, 2023, the Company was in default under the Credit Facility due to non-compliance with a covenant. On May 19, 2023 the Company executed a Waiver and First Amendment agreement which provides for a waiver of previous defaults and new financial covenants. On August 30, 2023, the Company entered into a Waiver and Second Amendment (the “Revolving Loan Amendment”) to the Credit Agreement. The Revolving Loan Amendment provides for, among other things, (i) a waiver of all known existing defaults under the Credit Agreement as of the date of the Revolving Loan Amendment and (ii) the amendment of the definition of “Borrowing Base” to reduce from $ 5,000,000 to $ 2,000,000 . On November 17, 2023, the Company voluntarily terminated the Credit Agreement as the Company could not comply with the debt coverage financial covenant effective September 30, 2023. There was no balance outstanding on the credit agreement as of the termination date. 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. For the three and six months ended September 30, 2022, the Company incurred approximately $ 0 and $ 8,000 , respectively, in amortization costs for deferred financing charges associated with the credit and security agreements with Crestmark and IHC. The Company also incurred interest expense of approximately $ 79,000 and $ 132,000 for the three and six months ended September 30, 2022, respectively, associated with the credit and security agreements with Crestmark and IHC. NOTE 7 – OPERATING LEASES At the time of this filing, the Company has operating lease agreements for offices in Florida and Hong Kong and a retail location in New York expiring in various years through 2038. The Company entered into an operating lease on August 23, 2023 for approximately 10,000 square feet of ground floor retail space and a portion of the basement underneath the ground floor retail space. The lease expires August 22, 2038, and the monthly base rent is $ 30,000 , subject to annual increases. The lease includes a 11-month free rent period between August 1, 2023 and June 30, 2024 and also includes a $ 700,000 reimbursement for tenant improvements upon completion of construction milestones as defined in the lease. Due to uncertainties as to whether these milestones will be met timely, the Company has not recorded any amounts related to the tenant improvement allowance in our condensed consolidated financial statements for the three and nine months ended September 30, 2023. The Company recorded a right of use asset of approximately $ 3,875,000 at lease inception in the balance sheet of our condensed consolidated financial statements. On August 31, 2023 our Ontario, California operating lease agreement for our primary warehouse expired. The Company did not renew the lease and instead transferred all of its warehousing and logistics operations to a third-party logistics facility. 11 THE SINGING MACHINE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 and 2022 (Unaudited) Supplemental balance sheet information related to leases as of September 30, 2023 is as follows: Supplemental balance sheet information related to leases as follows: SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES As of September 30, 2023 As of March 31, 2023 Assets: Operating lease - right-of-use assets $ 4,002,595 $ 561,185 Liabilities Current Current portion of operating leases $ 112,647 $ 508,515 Operating lease liabilities, net of current portion $ 3,825,115 $ 87,988 Supplemental statement of operations information related to operating leases is as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE Three Months Ended Three Months Ended Six Months Ended Six Months Ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Operating lease expense as a component of general and administrative expenses $ 283,450 $ 227,839 $ 520,457 457,088 Supplemental cash flow information related to operating leases is as follows: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow paid for operating leases $ 560,559 $ 232,770 $ 812,872 463,521 Lease term and Discount Rate Weighted average remaining lease term (years) 15.1 Weighted average discount rate 12 % The following table summarizes information regarding lease maturities and balance due as follows: SCHEDULE OF OPERATING LEASE MATURITIES Year Operating Leases 2023 (remaining three months) $ 45,222 2024 268,669 2025 355,033 2026 529,000 2027 585,000 2028 610,500 Thereafter 7,554,718 Total minimum future payments 9,948,142 Less: interest 6,010,380 Total operating lease liabilities $ 3,937,762 Less: current portion of lease liabilities 112,647 Operating lease liabilities, net of current portion $ 3,825,115 NOTE 8 – STOCK COMPENSATION EXPENSE Equity Incentive Plan On April 12, 2022, the Company’s Board of Directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan, (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 233,333 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) 33,334 shares, and (iii) a lesser amount as determined by the Company’s Board of Directors . The shares of common stock subject to stock awards granted under the 2022 Plan that lapse, terminate, expire prior to exercise, are canceled or are forfeited, shall again become available for issuance under the 2022 Plan. The 2022 Plan authorized an aggregate of 266,667 shares of the Company’s common stock available to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. As of September 30, 2023, the Company had granted 24,446 shares of common stock and 107,752 common stock options under the 2022 Plan of which 54,252 stock options were vested leaving 134,469 shares available for issue. 12 THE SINGING MACHINE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 and 2022 (Unaudited) Common Stock Options During the three and six months ended September 30, 2023, the Company did not issue any stock options. A summary of stock option activity for the six months ended September 30, 2023 is summarized below: SUMMARY OF STOCK OPTION ACTIVITY Number of Options Weighted Average Exercise Price Weighted Average Contractual Life Stock Options: Balance at beginning of period 161,427 $ 7.90 6.6 Forfeited ( 47,666 ) $ 7.26 - Balance at end of period 113,761 $ 8.08 6.2 Options exercisable at end of period 91,261 $ 8.06 As of September 30, 2023, there was unrecognized expense of approximately $ 142,000 remaining on options currently vesting over time with an approximate average of 21 months remaining until these options are fully vested. The vested options as of September 30, 2023 had no intrinsic value. For the three months ended September 30, 2023 and 2022, the stock compensation expense was approximately $ 36,000 and $ 70,000 , respectively. For the six months ended September 30, 2023 and 2022, the stock compensation expense was approximately $ 99,000 and $ 231,000 , respectively. Warrants As of both September 30, and March 31, 2023, there were 902,113 warrants outstanding at an average exercise price of $ 3.04 . There were no changes in warrants outstanding during the period. As of September 30, 2023, the Company’s outstanding 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 NOTE 9 – COMPUTATION OF EARNINGS PER SHARE Computation of basic and dilutive earnings (loss) per share was as follows: SCHEDULE OF BASIC AND DILUTIVE EARNINGS (LOSS) PER SHARE For the three months ended September 30, 2023 For the three months ended September 30, 2022 For the six months ended September 30, 2023 For the six months ended September 30, 2022 Net income (loss) $ 97,535 $ 296,467 $ ( 2,362,146 ) $ 280,464 Weighted-average common shares outstanding 4,220,259 3,071,131 4,063,697 2,484,660 Weighted-average diluted shares outstanding 4,220,259 3,610,188 4,063,697 2,961,631 Basic net income (loss) per share $ 0.02 $ 0.10 $ ( 0.58 ) $ 0.11 Diluted net income (loss) per share $ 0.02 $ 0.08 $ ( 0.58 ) $ 0.09 Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Potentially dilutive securities (including warrants and stock options) are excluded from the diluted EPS in loss periods when the applicable exercise price is greater than the market price on their period end date as their effect would be anti-dilutive. 13 THE SINGING MACHINE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 and 2022 (Unaudited) For the three and six months ended September 30, 2023, options to purchase 91,261 shares of common stock and 902,113 common stock warrants were excluded from the calculation of diluted EPS per share as the result would have been anti-dilutive. For the three and six months ended September 30, 2022, options to purchase 49,781 shares of common stock were excluded in the calculation of diluted net income per share as the result would have been anti-dilutive. NOTE 10 – RELATED PARTY TRANSACTIONS The Company has an ongoing music subscription sharing agreement with Stingray Group, Inc. (“Stingray”), who has a minority interest in the Company, which enables subscribers to access a digital music library maintained by Stingray for the benefit of the Company and its retail customers. For the three months ended September 30, 2023 and 2022, the Company received music subscription revenue of approximately $ 156,000 and $ 123,000 , respectively. For the six months ended September 30, 2023 and 2022, the Company received music subscription revenue of approximately $ 332,000 and $ 255,000 , respectively. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations. On September 30, 2023 and March 31 2023, the Company had approximately $ 165,000 and $ 218,000 , respectively, due from Stingray for music subscription reimbursement. Stingray has one representative on the Company’s board of directors. For the three months ended September 30, 2023 and 2022, the Company compensated this board member approximately $ 16,000 and $ 0 , respectively for his services to the board. For the six months ended September 30, 2023 and 2022, the Company compensated this board member approximately $ 16,000 and $ 24,000 , respectively for his services to the board. Such board compensation is recorded within general and administrative expenses on the condensed consolidated statements of operations. As of September 30, 2023 and March 31, 2023, the Company had approximately $ 0 and $ 21,000 due from the Company’s largest shareholder, Ault Alliance, Inc. (“AAI”) for trade show expenses incurred on behalf of AAI in January, 2023. AAI has three representatives on the Company’s board of directors who are compensated for their services to the board. For both the three and six months ended September 30, 2023 and 2022, these board members received approximately $ 48,000 and $ 10,000 , respectively for their services to the board. Such board compensation is recorded within general and administrative expenses on the condensed consolidated statements of operations. NOTE 11 – CONCENTRATIONS OF CREDIT RISK AND REVENUE The Company derives a majority of its revenues from retailers of products in the United States. The Company’s allowance for doubtful accounts is based upon management’s estimates and historical experience and reflects the fact that accounts receivable is concentrated with several large customers. At September 30, 2023, there were two customers in North America that individually owed over 10 % of total accounts receivable. Amounts due from these customers were approximately 44 % and 28 %, respectively, of total accounts receivable as of September 30, 2023. At March 31, 2023, there were three customers in North America that individually owed over 10 % of total accounts receivable. Amounts due from these customers were approximately 47 %, 18 % and 14 %, respectively, of total accounts receivable as of March 31, 2023. The Company generates most of its revenue from retailers of products in the United States with a significant amount of sales concentrated with several large customers, the loss of which could have an adverse impact on the financial position of the Company. For the three months ended September 30, 2023, there were three customers who individually accounted for 10 % or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 28 %, 22 % and 21 %, respectively. For the three months ended September 30, 2022, there were three customers who individually accounted for 10 % or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 43 %, 29 % and 10 %, respectively. For the six months ended September 30, 2023, there were three customers who individually accounted for 10 % or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 38 %, 20 % and 18 %, respectively. For the six months ended September 30, 2022, there were two customers who individually accounted for 10 % or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 46 %, and 32 %, respectively. NOTE 12 – INCOME TAXES For the three and six months ended September 30, 2023, we did no t 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 and six months ended September 30, 2022, approximately $ 102,000 and $ 97,000 , respectively. 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 three and six months ended September 30, 2023 and the utilization of certain deferred tax assets and credits for the three and six months ended September 30, 2022. 14