Algorhythm Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS The Singing Machine Company, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2024 December 31, 2023 (Unaudited) Assets Current Assets Cash $ 4,125,000 $ 6,703,000 Accounts receivable, net of allowances of $ 275,000 and $ 174,000 , respectively 3,305,000 7,308,000 Accounts receivable related parties 133,000 269,000 Accounts receivable 133,000 269,000 Inventory 6,493,000 6,871,000 Returns asset 1,262,000 1,919,000 Prepaid expenses and other current assets 214,000 136,000 Total Current Assets 15,532,000 23,206,000 Property and equipment, net 352,000 404,000 Operating leases - right of use assets 3,841,000 3,926,000 Other non-current assets 179,000 179,000 Total Assets $ 19,904,000 $ 27,715,000 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 3,947,000 $ 7,616,000 Accrued expenses 2,315,000 2,614,000 Refund due to customer 1,443,000 1,743,000 Customer prepayments 408,000 687,000 Reserve for sales returns 2,419,000 3,390,000 Other current liabilities 58,000 75,000 Current portion of operating lease liabilities 55,000 84,000 Total Current Liabilities 10,645,000 16,209,000 Other liabilities, net of current portion - 3,000 Operating lease liabilities, net of current portion 4,029,000 3,925,000 Total Liabilities 14,674,000 20,137,000 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; 6,418,061 issued and outstanding at March 31, 2024 and December 31, 2023, respectively 64,000 64,000 Additional paid-in capital 33,448,000 33,429,000 Accumulated deficit ( 28,282,000 ) ( 25,915,000 ) Total Shareholders’ Equity 5,230,000 7,578,000 Total Liabilities and Shareholders’ Equity $ 19,904,000 $ 27,715,000 See notes to the condensed consolidated financial statements 3 The Singing Machine Company, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) March 31, 2024 March 31, 2023 Three Months Ended March 31, 2024 March 31, 2023 Net Sales $ 2,426,000 $ 3,383,000 Cost of Goods Sold 1,924,000 2,564,000 Gross Profit 502,000 819,000 Operating Expenses Selling expenses 630,000 812,000 General and administrative expenses 2,159,000 2,153,000 Total Operating Expenses 2,789,000 2,965,000 Loss from Operations ( 2,287,000 ) ( 2,146,000 ) Other (Expenses) Income Gain from Employee Retention Credit Program refund - 704,000 Other Expense - ( 1,000 ) Interest expense ( 28,000 ) ( 40,000 ) Total Other (Expenses) Income, net ( 28,000 ) 663,000 Loss Before Income Tax Provision ( 2,315,000 ) ( 1,483,000 ) Income Tax Provision ( 52,000 ) ( 1,502,000 ) Net Loss $ ( 2,367,000 ) $ ( 2,985,000 ) Loss per Common Share Basic and Diluted $ ( 0.37 ) $ ( 0.96 ) Weighted Average Common and Common Equivalent Shares: Basic and Diluted 6,418,061 3,114,397 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 March 31, 2024 and 2023 (Unaudited) Shares Amount Paid in Capital Other Deficit Total Common Stock Additional Accumulated Shares Amount Paid in Capital Other Deficit Total Balance at December 31, 2023 6,418,061 $ 64,000 33,429,000 $ - $ ( 25,915,000 ) $ 7,578,000 Net Income - - - - ( 2,367,000 ) ( 2,367,000 ) Employee compensation-stock option - - 19,000 - - 19,000 Balance at March 31, 2024 6,418,061 $ 64,000 $ 33,448,000 $ - $ ( 28,282,000 ) $ 5,230,000 Balance at December 31, 2022 3,148,219 $ 31,000 $ 29,699,000 $ - $ ( 16,532,000 ) $ 13,198,000 Balance 3,148,219 $ 31,000 $ 29,699,000 $ - $ ( 16,532,000 ) $ 13,198,000 Net Income - - - - ( 2,985,000 ) ( 2,985,000 ) Issuance of common stock 5,039 - 36,000 - - 36,000 Exercise of pre-funded common stock warrants 14,230 - 14,000 - - 14,000 Employee compensation-stock option - - 74,000 - - 74,000 Other - 1,000 ( 1,000 ) ( 6,000 ) - ( 6,000 ) Balance at March 31, 2023 3,167,488 $ 32,000 $ 29,822,000 $ ( 6,000 ) $ ( 19,517,000 ) $ 10,331,000 Balance 3,167,488 $ 32,000 $ 29,822,000 $ ( 6,000 ) $ ( 19,517,000 ) $ 10,331,000 See notes to the condensed consolidated financial statements 5 The Singing Machine Company, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended For the Three Months Ended March 31, 2024 March 31, 2023 Cash flows from operating activities Net loss $ ( 2,367,000 ) $ ( 2,985,000 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 52,000 55,000 Provision for estimated cost of returns 658,000 1,380,000 Provision for inventory obsolescence - 139,000 Credit losses 101,000 27,000 Loss from disposal of property and equipment - 3,000 Stock based compensation 19,000 74,000 Amortization of right of use assets 84,000 87,000 Change in net deferred tax assets - 1,399,000 Changes in operating assets and liabilities: Accounts receivable 3,902,000 4,922,000 Accounts receivable - related parties 136,000 43,000 Inventories 379,000 ( 175,000 ) Prepaid expenses and other current assets ( 78,000 ) 40,000 Other non-current assets - ( 156,000 ) Accounts payable ( 3,669,000 ) ( 315,000 ) Accrued expenses ( 299,000 ) ( 970,000 ) Refunds due to customer ( 300,000 ) 490,000 Prepaids from customers ( 279,000 ) - Reserve for sales returns ( 971,000 ) ( 2,035,000 ) Operating lease liabilities 75,000 ( 89,000 ) Net cash (used in) provided by operating activities ( 2,557,000 ) 1,934,000 Cash flows from investing activities Purchase of property and equipment - ( 95,000 ) Net cash used in investing activities - ( 95,000 ) Cash flows from financing activities Proceeds from issuance of stock, net of offering costs - 36,000 Subscriptions receivable - ( 6,000 ) Net payment on revolving lines of credit - ( 1,761,000 ) Payments on installment notes ( 21,000 ) ( 19,000 ) Proceeds from exercise of common stock warrants - 14,000 Payments on finance leases - ( 3,000 ) Net cash used in financing activities ( 21,000 ) ( 1,739,000 ) Net change in cash ( 2,578,000 ) 100,000 Cash at beginning of year 6,703,000 2,795,000 Cash at end of period $ 4,125,000 $ 2,895,000 Supplemental disclosures of cash flow information: Cash paid for interest $ 27,000 $ 24,000 Non-Cash investing and financing cash flow information: Equipment purchased under capital lease $ - $ 55,000 See notes to the condensed consolidated financial statements 6 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 and 2023 (Unaudited) NOTE 1 – NATURE OF BUSINESS We are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories, and musical recordings. We are a global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children. 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 Change in Fiscal Year During 2023, our Board of Directors approved a change in our fiscal year end from March 31 to December 31. Our results of operations, cash flows, and all transactions impacting shareholders’ equity presented in this Quarterly Report on Form 10-Q as of March 31, 2024 are for the three-month period ended March 31, 2024 and March 31, 2023. Private Placement On November 20, 2023, 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 2,198,000 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”). The term of the Lease Agreement is for fifteen ( 15 ) years, or on such an 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. In March 2024, the Company initiated the termination of this lease under certain provisions made available under the Lease Agreement. The Landlord and the Company are in active discussions as to the terms of the lease termination however as of this filing, it is too early in the negotiation process to estimate any potential loss, if any, related to the lease termination process. 7 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 and 2023 (Unaudited) 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 $ 1,800,000 in shares of the Company’s common stock. For the three months ended March 31, 2024 and 2023, the Company received net proceeds of approximately $ 0 and $ 36,000 , respectively, after payment of brokerage commissions and administrative fees to the agent. As of May 12, 2023, the Company terminated the Sales Agreement. NOTE 3 – LIQUIDITY, GOING CONCERN AND MANAGEMENT PLANS As of March 31, 2024, the Company had cash on hand of approximately $ 4,125,000 which is not sufficient to fund the Company’s planned operations through one year after the date the consolidated financial statements are issued. The Company has a recent history of recurring operating losses and decreases in working capital. These factors create substantial doubt about the Company’s ability to continue as a going concern for at least one year after the date that the Company’s audited consolidated financial statements are issued. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. Management intends to finance operations with future debt or equity financings, however, if and when such financings may occur are uncertain. In making this assessment management performed a comprehensive analysis of the Company’s current circumstances including: its financial position, cash flow and cash usage forecasts, and obligations and debts. Although management has a recent history of successful capital raises, the analysis used to determine the Company’s ability as a going concern does not include cash sources outside the Company’s direct control that management expects to be available within the next 12 months. NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited financial statements for the three months ended March 31, 2024 and 2023 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 balance sheet as of March 31, 2024 and condensed financial statements information for the three months ended March 31, 2024 and 2023 are unaudited whereas the condensed consolidated balance sheet as of December 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 10-KT for the transition period ended December 31, 2023. There have been no changes to our significant accounting policies as disclosed on the Company’s annual report on Form 10-KT for the transition period ended December 31, 2023. 8 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 and 2023 (Unaudited) RECENT ACCOUNTING PRONOUNCEMENTS In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . ASU 2023-09 is intended to enhance the usefulness of income tax disclosures by requiring entities to disclose specific rate reconciliations, amount of income taxes separate by federal and individual tax jurisdictions, and the amount of income or loss from continuing operations before income tax expense or benefit disaggregated between federal, state and foreign. ASU 2023-09 is effective for the Company for its fiscal year beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on our consolidated financial statements and related disclosures. NOTE 5 – FINANCING Oxford Credit Facility On March 28, 2024, the Company entered into a Loan and Security Agreement with Oxford Business Credit (the “Credit Agreement”), as Lender. The Credit Agreement established a secured asset-backed revolving credit facility which is comprised of a maximum $ 2,000,000 revolving credit facility (“Credit Facility”). Availability under the Credit Facility is determined monthly by a borrowing base comprised of a percentage of eligible accounts receivable 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). As of March 31, 2024, there was no availability under the Credit Facility as there were no eligible accounts receivable. Borrowings under the Credit Facility take the form of base rate loans at interest rates of the Wall Street Journal Prime Rate plus 2.5 %, but in any event no less than 10 %. The Credit Agreement includes certain covenants which include, but are not limited to restrictions on debt, asset liens, capital expenditures, formation of new entities and financial covenants. For the three months ended March 31, 2024, the Company incurred interest expense of approximately $ 25,000 associated with financing costs from the Credit Agreement. The Credit Agreement is for a two -year term that expires on November 28, 2026 , and automatically renews for an additional one-year term on each anniversary of date of the agreement unless the Company notifies Oxford within 60 days before the anniversary date of its intention to pay off the Credit Facility and terminate the Credit Agreement. The Company is subject to a two percent ( 2 %) Exit Fee if the Company terminates the Credit Agreement and repays the obligations under Credit Facility prior to the anniversary date of the Credit Agreement. The Exit Fee shall automatically renew on the two-year anniversary date of the Loan Agreement for an additional one-year period unless the Company notifies Lender in writing within sixty (60) days before such anniversary date of Borrower’s intention to pay off this Credit Facility and terminate the Credit Agreement and all obligations of the Credit Facility are paid in full by such anniversary date. There were no draws against the Credit Facility to date. Fifth Third Bank 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 $ 15,000,000 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 Facility). Costs associated with closing of the Credit Agreement of approximately $ 254,000 were deferred and being amortized over life of the loan. During the three months ended March 31, 2024, and 2023, the Company recorded interest expense of approximately $ 0 and $ 21,000 , respectively associated with the amortization of deferred financing costs from the Credit Agreement. 9 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 and 2023 (Unaudited) 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. During the three months ended March 31, 2024, and 2023, the Company incurred interest expense of approximately $ 0 and $ 36,000 , respectively, associated with interest and financing costs from the Credit Agreement. On May 19, 2023, the Company executed a Waiver and First Amendment agreement which provides for a waiver of previous defaults and instituted new 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. NOTE 6 - COMMITMENTS AND CONTINGENCIES 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”). It was the Company’s intention to use the Premises as a new karaoke venue, offering immersive karaoke technology and audio-visual capabilities, with restaurant and bar offerings however due to lack of funding, the Company initiated termination of the lease in March 2024 (See Note 8 - Operating Leases). The term of the Lease Agreement is for fifteen ( 15 ) years, or on such an 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 July 1, 2024, with scheduled increases over the term, as set forth in the Lease Agreement. In March 2024, the Company initiated the termination of this lease under certain provisions made available under the Lease Agreement. The Landlord and the Company are in active discussions as to the terms of the lease termination however as of this filing, it is too early in the negotiation process to estimate any potential loss, if any, related to the lease termination process. Derivative Litigation On December 21, 2023, Ault Lending, LLC, a wholly owned subsidiary of Ault Alliance, Inc. (“Ault”), one of the Company’s largest shareholders, filed a derivative shareholder action in Delaware Chancery Court against the Company, its Directors, and other Company shareholders (The Stingray Group, Inc. and Regalia Ventures) (“the Defendants”) for alleged breach of fiduciary duty in approving a recent above-market private placement equity transaction. The Complaint alleges the Company, and its Directors followed an inadequate process in evaluating the private placement transaction which occurred back in November 2023 and entered into the transaction with an intent to dilute Ault’s ownership stake in the Company. The Defendants have retained Delaware counsel to represent them in this matter and the Company has filed a motion to dismiss the suit. Other than what is disclosed above, we are not a party to, and our property is not the subject of, any pending material legal proceedings. 10 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 and 2023 (Unaudited) 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 agreement, effective October 1, 2017, for our corporate headquarters located in Fort Lauderdale, Florida where we lease approximately 6,500 square feet of office space. The lease expired on March 31, 2024 . The base rent payment is approximately $ 9,950 per month, subject to annual adjustments. On February 22, 2024, the Company executed a lease extension for 14 months effective April 1, 2024, and expires on May 31, 2025. The base rent on the extension is approximately $10,553 per month subject to a 3% annual adjustment. 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 July 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 at lease inception or the three months ended March 31, 2024. Supplemental balance sheet information related to leases as of March 31, 2024 and December 31, 2023 is as follows: SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES Assets: March 31, 2024 December 31, 2023 Operating lease - right-of-use assets $ 3,841,000 $ 3,926,000 Liabilities Current Current portion of operating leases $ 55,000 $ 84,000 Operating lease liabilities, net of current portion $ 4,029,000 $ 3,925,000 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 March 31, 2024 March 31, 2023 Operating lease expense as a component of general and administrative expenses $ 196,000 $ 241,000 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 $ 45,000 $ 252,000 Lease term and Discount Rate Weighted average remaining lease term (years) 14.4 12.4 Weighted average discount rate 11.0 % 6.5 % Minimum future payments under all operating leases as of March 31, 2024, are as follows: SCHEDULE OF OPERATING LEASE MINIMUM FUTURE PAYMENTS Payments due by period Amount 2024 (remaining 9 months) $ 223,000 2025 355,000 2026 529,000 2027 585,000 2028 611,000 Thereafter 7,555,000 Total Minimum Future Payments 9,858,000 Less: Interest 5,774,000 Total operating lease liabilities $ 4,084,000 Less: current portion of lease liabilities 55,000 Operating lease liabilities, net of current portion $ 4,029,000 11 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 and 2023 (Unaudited) NOTE 8 – STOCK COMPENSATION EXPENSE Equity Incentive Plan On April 12, 2022, the Board of Directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan, or the 2022 Plan. The 2022 Plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards collectively, the “Awards.” Awards may be granted under the 2022 Plan to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. There was no share base compensation awards issued under the 2022 Plan during the three months ended March 31, 2024 and 2023. During the quarter ended March 31, 2024 there were 1,250 shares forfeited during the three months ended March 31, 2024. As of March 31, 2024 there were 166,719 shares available to be issued under the 2022 Plan. As of March 31, 2024, there was an unrecognized expense of approximately $ 98,000 remaining on options currently vesting over time with an approximate weighted average of fifteen months until these options are fully vested. The vested options as of March 31, 2024, had no intrinsic value. Warrants Common warrants issued and outstanding as of March 31, 2024 and December 31, 2023, were 902,113 . There were no changes in the warrants outstanding during the period. 12 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 and 2023 (Unaudited) As of March 31, 2024, the Company’s warrants by expiration date were as follows: SCHEDULE OF WARRANTS EXPIRATION Number of Common Warrants Exercise Price Expiration Date 802,113 $ 2.80 September 15, 2026 100,000 $ 5.00 May 23, 2027 902,113 NOTE 9 - COMPUTATION OF (LOSS) EARNINGS PER SHARE Computation of basic and dilutive loss per share for the three months ended March 31, 2024 and 2023 are as follows: SCHEDULE OF BASIC AND DILUTIVE LOSS PER SHARE For the three months ended March 31, 2024 For the three months ended March 31, 2023 Net Loss $ 2,367,000 $ 2,985,000 Weighted-average common and dilutive shares outstanding 6,418,061 3,114,397 Basic and diluted net loss per share ( 0.37 ) $ ( 0.96 ) Basic net loss per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share reflects the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase shares of the Company’s common stock at the average market price during the period using the treasury stock method. For the three months ended March 31, 2024 and 2023, options to purchase 90,844 and 53,675 shares of common stock, respectively and options to purchase 902,113 common stock warrants for both March 31, 2024 and 2023 were excluded in the calculation of diluted net loss per share as the result would have been anti-dilutive. NOTE 10 - INCOME TAXES The Company’s income tax provision for the three months ended March 31, 2024, was approximately $ 52,000 due to income taxes due on amended federal tax returns filed for 2020 and 2021 which took into account the one-time refunds received from the Employee Retention Credit program. The Company’s income tax provision for the three months ended March 31, 2023, was approximately $ 1,502,000 as the Company recognized a valuation reserve of all of its deferred tax assets based on the recent history of losses and forecasts that suggested the Company would not be able to utilize the deferred tax assets in the future. 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 months ended March 31, 2024 and 2023. 13 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 and 2023 (Unaudited) NOTE 11 – REVENUE DISAGGREGATION The Company disaggregates revenues by product line and major geographic region as most of its revenue is generated by the sales of karaoke hardware and the Company has no other material business segments: Revenue by product line is as follows: SCHEDULE OF REVENUE BY PRODUCT LINE Product Line March 31, 2024 March,31, 2023 Three Months Ended Product Line March 31, 2024 March,31, 2023 Classic Karaoke Machines $ 942,000 $ 1,571,000 Licensed Products 90,000 - SMC Kids Toys 65,000 133,000 Microphones and Accessories 1,225,000 1,986,000 Streaming Karaoke Machines 104,000 ( 307,000 ) Total Net Sales $ 2,426,000 $ 3,383,000 Net sales for both of the three months ended March 31, 2024 and 2023 of $ 2,426,000 and $ 3,383,000 , respectively, were made to North American customers. 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 March 31, 2024 and 2023, co-op promotion incentives were approximately $ 109,000 and $ 172,000 , 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 March 31, 2024 and December 31, 2023, was approximately $ 2,419,000 and $ 3,390,000 , 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 March 31, 2024 and December 31, 2023, was approximately $ 1,262,000 and $ 1,919,000 , 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. 14 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 and 2023 (Unaudited) NOTE 12 - 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 credit losses is based upon management’s estimates and historical experience and reflects the fact that accounts receivable is concentrated with several large customers. At March 31, 2024, 69 % of accounts receivable were due from three customers in North America that individually owed over 10% of total accounts receivable. On December 31, 2023, 82 % of accounts receivable were due from four customers in North America that individually owed over 10% of total accounts receivable. Revenues derived from our top three customers for the three months ended March 31, 2024, and 2023, were 84 % and 89 % of total revenue, respectively. Revenues from customers representing greater than 10% of total net sales derived from our top two customers as a percentage of net sales for the three months ended March 31, 2024, were 60 % and 14 %. The loss of any of these customers could have an adverse impact on the Company. NOTE 13 – RELATED PARTY TRANSACTIONS Due To/From Related Parties Stingray Group, Inc. (“Stingray”) is an existing shareholder with board representation. The Company has a music subscription sharing agreement with Stingray. For the three months ended March 31, 2024, and 2023, amounts earned from the subscription agreement were approximately $ 240,000 and $ 218,000 , respectively. This amount was included as a component of net sales in the accompanying condensed consolidated statements of operations. On March 31, 2024 and December 31 2023, the Company had approximately $ 133,000 and $ 269,000 , respectively, due from Stingray for music subscription reimbursement. 15