Algorhythm Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS The Singing Machine Company, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2024 December 31, 2023 (Unaudited) Assets Current Assets Cash $ 1,245,000 $ 6,703,000 Accounts receivable, net of allowances of $ 86,919 and $ 174,000 , respectively 2,349,000 7,308,000 Due from Oxford Bank 187,000 - Accounts receivable related parties 414,000 269,000 Accounts receivable 414,000 269,000 Inventory 6,910,000 6,871,000 Returns asset 619,000 1,919,000 Prepaid expenses and other current assets 67,000 136,000 Total Current Assets 11,791,000 23,206,000 Property and equipment, net 305,000 404,000 Operating leases - right of use assets 178,000 3,926,000 Other non-current assets 93,000 179,000 Total Assets $ 12,367,000 $ 27,715,000 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 3,676,000 $ 7,616,000 Accrued expenses 1,842,000 2,614,000 Refund due to customer 1,171,000 1,743,000 Customer prepayments 38,000 687,000 Reserve for sales returns 2,174,000 3,390,000 Other current liabilities 37,000 75,000 Current portion of operating lease liabilities 165,000 84,000 Total Current Liabilities 9,103,000 16,209,000 Other liabilities, net of current portion - 3,000 Operating lease liabilities, net of current portion 4,136,000 3,925,000 Total Liabilities 13,239,000 20,137,000 Commitments and Contingencies - - Shareholders’ (Deficit) 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; 7,418,061 issued and 6,418,061 shares outstanding at June 30, 2024 and 6,418,061 issued and outstanding at December 31, 2023. 64,000 64,000 Additional paid-in capital 33,465,000 33,429,000 Accumulated deficit ( 34,401,000 ) ( 25,915,000 ) Total Shareholders’ (Deficit) Equity ( 872,000 ) 7,578,000 Total Liabilities and Shareholders’ (Deficit) Equity $ 12,367,000 $ 27,715,000 See notes to the condensed consolidated financial statements 3 The Singing Machine Company, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 For the Three Months Ended For the Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Net Sales $ 2,440,000 $ 2,625,000 $ 4,866,000 $ 6,008,000 Cost of Goods Sold 2,116,000 2,096,000 4,040,000 4,659,000 Gross Profit 324,000 529,000 826,000 1,349,000 Operating Expenses Selling expenses 547,000 445,000 1,177,000 1,257,000 General and administrative expenses 2,053,000 2,515,000 4,212,000 4,670,000 Operating lease impairment expense 3,878,000 - 3,878,000 - Total Operating Expenses 6,478,000 2,960,000 9,267,000 5,927,000 Loss from Operations ( 6,154,000 ) ( 2,431,000 ) ( 8,441,000 ) ( 4,578,000 ) Other (Expenses) Income Gain from Employee Retention Credit Program refund - - - 704,000 Interest expense ( 17,000 ) ( 29,000 ) ( 45,000 ) ( 69,000 ) Total Other (Expenses) Income, net ( 17,000 ) ( 29,000 ) ( 45,000 ) 635,000 Loss Before Income Tax Benefit (Provision) ( 6,171,000 ) ( 2,460,000 ) ( 8,486,000 ) ( 3,943,000 ) Income Tax Benefit (Provision) 52,000 - - ( 1,502,000 ) Net Loss $ ( 6,119,000 ) $ ( 2,460,000 ) $ ( 8,486,000 ) $ ( 5,445,000 ) Loss per common share Basic and diluted $ ( 0.95 ) $ ( 0.64 ) $ ( 1.32 ) $ ( 1.56 ) Weighted Average Common and Common Equivalent Shares: Basic and diluted 6,418,061 3,872,447 6,418,061 3,487,299 See notes to the condensed consolidated financial statements 4 The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY For the Three Months Ended June 30, 2024 and 2023 (Unaudited) Shares Amount Capital Other Deficit Total Common Stock Additional Paid in Accumulated Shares Amount Capital Other Deficit Total Balance at March 31, 2024 6,418,061 $ 64,000 $ 33,448,000 $ - $ ( 28,282,000 ) $ 5,230,000 Net loss - - - - ( 6,119,000 ) ( 6,119,000 ) Stock based compensation - - 17,000 - - 17,000 Balance at June 30, 2024 6,418,061 $ 64,000 $ 33,465,000 $ - $ ( 34,401,000 ) $ ( 872,000 ) Common Stock Additional Paid in Accumulated Shares Amount Capital Other Deficit Total Balance at March 31, 2023 3,167,488 $ 32,000 $ 29,822,000 $ ( 6,000 ) $ ( 19,517,000 ) $ 10,331,000 Net loss - - - - ( 2,460,000 ) ( 2,460,000 ) Sale of common stock, net of offering costs 1,052,771 11,000 1,593,000 - - 1,604,000 Stock based compensation - - 63,000 - - 63,000 Other - ( 1,000 ) 1,000 6,000 - 6,000 Balance at June 30, 2023 4,220,259 $ 42,000 $ 31,479,000 $ - $ ( 21,977,000 ) $ 9,544,000 For the Six Months Ended June 30, 2024 and 2023 (Unaudited) Shares Amount Capital Deficit Total Common Stock Additional Paid in Accumulated Shares Amount Capital Deficit Total Balance at December 31, 2023 6,418,061 $ 64,000 $ 33,429,000 $ ( 25,915,000 ) $ 7,578,000 Net loss - - - ( 8,486,000 ) ( 8,486,000 ) Stock based compensation - - 36,000 - 36,000 Balance at June 30, 2024 6,418,061 $ 64,000 $ 33,465,000 $ ( 34,401,000 ) $ ( 872,000 ) Balance at December 31, 2022 3,148,219 $ 31,000 $ 29,698,000 $ ( 16,531,000 ) $ 13,198,000 Balance 3,148,219 $ 31,000 $ 29,698,000 $ ( 16,531,000 ) $ 13,198,000 Net loss - - - ( 5,445,000 ) ( 5,445,000 ) Sale of common stock, net of offering costs 1,057,810 11,000 1,629,000 - 1,640,000 Sale of common stock warrants 14,230 - 14,000 - 14,000 Stock based compensation - - 138,000 - 138,000 Other - - - ( 1,000 ) ( 1,000 ) Balance at June 30, 2023 4,220,259 $ 42,000 $ 31,479,000 $ ( 21,977,000 ) $ 9,544,000 Balance 4,220,259 $ 42,000 $ 31,479,000 $ ( 21,977,000 ) $ 9,544,000 See notes to the condensed consolidated financial statements. 5 The Singing Machine Company, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) June 30, 2024 June 30, 2023 For the Six Months Ended June 30, 2024 June 30, 2023 Cash flows from operating activities Net loss $ ( 8,486,000 ) ( 5,445,000 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 105,000 238,000 Provision for estimated cost of returns 1,301,000 1,820,000 Provision for inventory obsolescence - 271,000 Credit losses 14,000 7,000 Operating lease impairment expense 3,878,000 - Loss from disposal of property and equipment - 3,000 Stock based compensation 36,000 138,000 Amortization of right of use assets 20,000 316,000 Change in net deferred tax assets - 1,399,000 Changes in operating assets and liabilities: Accounts receivable 4,945,000 6,303,000 Due from banks ( 187,000 ) - Accounts receivable - related parties ( 145,000 ) 87,000 Inventories ( 38,000 ) ( 1,714,000 ) Prepaid expenses and other current assets 69,000 ( 167,000 ) Other non-current assets ( 64,000 ) ( 135,000 ) Accounts payable ( 3,940,000 ) 560,000 Accrued expenses ( 771,000 ) ( 1,939,000 ) Customer deposits ( 572,000 ) - Refunds due to customers ( 649,000 ) 577,000 Reserve for sales returns ( 1,217,000 ) ( 2,604,000 ) Operating lease liabilities 291,000 ( 329,000 ) Net cash used in operating activities ( 5,410,000 ) ( 614,000 ) Cash flows from investing activities Purchase of property and equipment ( 6,000 ) ( 137,000 ) Net cash used in investing activities ( 6,000 ) ( 137,000 ) Cash flows from financing activities Proceeds from sale of stock, net of offering costs - 1,640,000 Net payments on revolving lines of credit - ( 1,761,000 ) Other ( 42,000 ) ( 33,000 ) Net cash used in financing activities ( 42,000 ) ( 154,000 ) Net change in cash ( 5,458,000 ) ( 905,000 ) Cash at beginning of year 6,703,000 2,795,000 Cash at end of period 1,245,000 1,890,000 Supplemental disclosures of cash flow information: Cash paid for interest 40,000 24,000 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 June 30, 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 June 30, 2024 are for the three and six month periods ended June 30, 2024 and 2023. ATM Offering June 2024 On June 26, 2024, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Ascendiant Capital markets, LLC, 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 $ 1,100,000 in shares of the Company’s common stock. On July 8, 2024, the Company entered into the First Amendment to the Sales Agreement (the “Amendment”) to increase the number of shares to be sold in the ATM Offering to $ 2,020,000 . On August 9, 2024, the Company entered into the Second Amendment to the Sales Agreement (the “Amendment”) to increase the number of shares to be sold in the ATM Offering to $ 3,100,000 . For the three and six months ended June 30, 2024, the Company had not yet sold any shares of its common stock from this ATM Offering. Pursuant to the agreement, the Agent is to be paid $ 30,000 in fees to cover legal and administrative expenses and will receive an amount equal to 3 % of the gross proceeds from each sale of the Company’s share of common stock. Subsequent to June 30, 2024 and through August 16, 2024 (the last trading day prior to filing), the Company sold 1,657,172 shares of common stock under the ATM offering, and received net proceeds from the ATM of approximately $ 1,676,000 after payment of brokerage commissions and administrative fees to the agent of approximately $ 51,000 . Asset Purchase On June 11, 2024, the Company and its wholly owned subsidiary SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab LLC” and collectively with the Company, the “Buyer”), SemiCab, Inc., a Delaware corporation (“SemiCab” or the “Seller”), Ajesh Kapoor and Vivek Sehgal entered into an asset purchase agreement (the “Asset Purchase Agreement”) pursuant to which the Seller agreed to sell and assign to the Company, and the Company agreed to purchase and assume from the Seller, substantially all the assets, and certain specified liabilities relating to the business of the Seller. Subject to certain exceptions set forth in the Asset Purchase Agreement, the parties agreed that the Buyer will not assume the liabilities of the Seller. SemiCab is an artificial intelligence, cloud-based collaborative transportation platform built to achieve the scalability required to predict and optimize semi-tractor trailer load efficiency. On July 3, 2024, the parties closed on the asset purchase whereby the Company issued to the Seller (i) 641,806 shares of the Company’s common stock (ii) a twenty percent ( 20 %) membership interest in SemiCab LLC. Pursuant to the asset acquisition agreement, the Company and Seller entered into an option agreement (the “Option Agreement”), granting the Buyer the right to acquire all of the issued and outstanding capital securities of SMCB Solutions Private Limited, a wholly owned subsidiary of the Seller, in consideration for 320,903 shares of common stock of the Company. The Option Agreement has not been exercised through the date of this filing. 7 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 and 2023 (Unaudited) 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. During the six months ended June 30, 2024, Jay Foreman has made a written request to register his 1,099,000 shares. 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. During the three months ended June 30, 2024, the Company abandoned its plans to continue use of the leased space due to failure to receive a liquor license. Consequently, the Company exercised its early termination provision of the Lease Agreement which was not accepted by the Landlord. While attempting to settle, the Company failed to make the first recurring cash lease payment due on July 31, 2024, and as a result defaulted on the lease. Due to the abandonment of the lease, all assets related to the lease were impaired. Assets including security deposits, rent deposits and right of use assets of approximately $ 3,878,000 have been written off during the three months ended June 30, 2024 and are included as a component of operating expenses in the accompanying condensed consolidated statements of operations. On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC, filed a civil action in the Supreme Court of the State of New York against MICS NY and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint alleges the Defendants breached the lease in various material respects. Based on the Company’s assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot reasonably estimate the potential loss or range of loss that may result from this action. NOTE 3 – LIQUIDITY, GOING CONCERN AND MANAGEMENT PLANS As of June 30, 2024, the Company had cash on hand of approximately $ 1,245,000 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. 8 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 and 2023 (Unaudited) 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 June 30, 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 June 30, 2024 and condensed financial statements information for the three and six months ended June 30, 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. 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 (the “Credit Agreement”) with Oxford Business Credit “Oxford”), 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 June 30, 2024, there was approximately $ 187,000 due from Oxford for cash collections received that exceeded the amount due on the Credit Agreement. As of June 30, 2024 there was approximately $ 89,000 available under the Credit Facility. 9 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 and 2023 (Unaudited) 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 and six months ended June 30, 2024, the Company incurred interest expense of approximately $ 17,000 and $ 42,000 , respectively 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 and six months ended June 30, 2023 the Company incurred approximately $ 21,000 and $ 42,000 , 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. During the three and six months ended June 30, 2023, the Company incurred interest expense of approximately $ 25,000 and $ 61,000 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 . 10 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 and 2023 (Unaudited) 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”). 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. During the three months ended June 30, 2024, the Company abandoned its plans to continue use of the leased space due to failure to receive a liquor license. Consequently, the Company exercised its early termination provision of the Lease Agreement which was not accepted by the Landlord. While attempting to settle, the Company failed to make the first recurring cash lease payment due on July 31, 2024, and as a result defaulted on the lease. Due to the abandonment of the lease, all assets related to the lease were impaired. Assets including security deposits, rent deposits and right of use assets of approximately $ 3,878,000 have been written off during the three months ended June 30, 2024 and are included as a component of operating expenses in the accompanying condensed consolidated statements of operations. On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC, filed a civil action in the Supreme Court of the State of New York against MICS NY and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint alleges the Defendants breached the lease in various material respects. Based on the Company’s assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot reasonably estimate the potential loss or range of loss that may result from this action. Derivative Action 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 Company filed a motion to dismiss the complaint. Based on the Company’s assessment of the facts underlying the claims, the uncertainty of the litigation, and the preliminary stage of the case, the Company cannot reasonably estimate the potential loss or range of loss that may result from this action. 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 which expired on March 31, 2024 . 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 $10,000 per month subject to a 3% annual adjustment. 11 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 and 2023 (Unaudited) 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 for the three and six months ended June 30, 2024. (See Note 6). Supplemental balance sheet information related to leases as of June 30, 2024 and December 31, 2023 is as follows: SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES Assets: June 30, 2024 December 31, 2023 Operating lease - right-of-use assets $ 178,000 $ 3,926,000 Liabilities Current Current portion of operating leases $ 165,000 $ 84,000 Operating lease liabilities, net of current portion $ 4,136,000 $ 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 Six Months Ended Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Operating lease expense as a component of general and administrative expenses $ 203,000 $ 237,000 $ 399,000 $ 483,000 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 $ 46,000 $ 252,000 $ 91,000 $ 504,000 Lease term and Discount Rate Weighted average remaining lease term (years) 14.3 13.2 Weighted average discount rate 12.0 % 6.5 % Minimum future payments under all operating leases as of June 30, 2024, are as follows: SCHEDULE OF OPERATING LEASE MINIMUM FUTURE PAYMENTS Payments due by period Amount 2024 (remaining six months) $ 271,000 2025 408,000 2026 529,000 2027 585,000 2028 611,000 Thereafter 7,555,000 Total minimum future payments $ 9,959,000 Less: Interest 5,658,000 Total operating lease liabilities $ 4,301,000 Less: current portion of lease liabilities 165,000 Operating lease liabilities, net of current portion $ 4,136,000 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 were no share base compensation awards issued under the 2022 Plan during the three and six months ended June 30, 2024 and 2023. There were 4,000 and 5,250 shares forfeited during the three and six months ended June 30, 2024, respectively. There were no shares forfeited during the three and six months ended June 30, 2023. As of June 30, 2024, there were 204,053 shares available to be issued under the 2022 Plan. As of June 30, 2024, there was an unrecognized expense of approximately $ 69,000 remaining on options currently vesting over time with an approximate weighted average of twelve months remaining until these options are fully vested. 12 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 and 2023 (Unaudited) The vested options as of June 30, 2024, had no intrinsic value. Warrants Common warrants issued and outstanding as of June 30, 2024 and December 31, 2023, were 902,113 . There were no changes in the warrants outstanding during the period. As of June 30, 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 PER SHARE Computation of basic and dilutive loss per share for the three and six months ended June 30, 2024 and 2023 are as follows: SCHEDULE OF BASIC AND DILUTIVE LOSS PER SHARE For the three months ended June 30, 2024 For the three months ended June 30, 2023 For the six months ended June 30, 2024 For the six months ended June 30, 2023 Net loss $ ( 6,119,000 ) $ ( 2,460,000 ) $ ( 8,486,000 ) $ ( 5,445,000 ) Weighted-average common shares outstanding 6,418,061 3,872,447 6,418,061 3,487,299 Basic loss per share $ ( 0.95 ) $ ( 0.64 ) $ ( 1.32 ) $ ( 1.56 ) 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 and six months ended June 30, 2024 and 2023, options to purchase 108,511 and 108,343 shares of common stock, respectively and options to purchase 902,113 common stock warrants for both June 30, 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 For the three months ended June 30, 2024 and 2023 the Company recognized an income tax benefit of approximately $ 52,000 and $ 0 , respectively. The Company is not forecasting any taxable income for the current year and had a loss before income tax benefit in the previous year. The Company’s income tax provision for the six months ended June 30, 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 and six months ended June 30, 2024 and 2023. 13 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 Three Months Ended Six Months Ended Product Line June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Classic Karaoke Machines $ 1,257,000 $ 1,463,000 $ 2,308,000 $ 2,729,000 Licensed Products 107,000 8,000 198,000 ( 4,000 ) SMC Kids Toys 102,000 21,000 171,000 154,000 Microphones and Accessories 865,000 957,000 1,818,000 2,737,000 Music and other income 109,000 176,000 371,000 392,000 Total Net Sales $ 2,440,000 $ 2,625,000 $ 4,866,000 $ 6,008,000 Sales by geographic region for the periods presented are as follows: SCHEDULE OF SALES BY GEOGRAPHICAL REGION June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Three Months Ended Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Australia 124,000 - 124,000 - North America 2,316,000 2,625,000 4,742,000 6,008,000 Total Net Sales $ 2,440,000 $ 2,625,000 $ 4,866,000 $ 6,008,000 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 June 30, 2024 and 2023, co-op promotion incentives were approximately $ 240,000 and $ 91,000 , respectively. For the six months ended June 30, 2024 and 2023, co-op promotion incentives were approximately $ 349,000 and $ 264,000 , 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 June 30, 2024 and December 31, 2023, was approximately $ 2,174,000 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. The asset is separately stated as returns asset on the condensed consolidated balance sheets. The Company’s estimated cost of returns as of June 30, 2024 and December 31, 2023, was approximately $ 619,000 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. 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 June 30, 2024, 79 % 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. 14 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 and 2023 (Unaudited) Revenues from customers representing greater than 10% of total net sales derived from our top three customers as a percentage of net sales were 39 %, 14 % and 13 % for the three months ended June 30, 2024. Revenues from customers representing greater than 10% of total net sales derived from one customer as a percentage of net sales was 87 % for the three months ended June 30, 2023. Revenues from customers representing greater than 10% of total net sales derived from our top three customers as a percentage of net sales were 50 %, 11 % and 10 % for the six months ended June 30, 2024. Revenues from customers representing greater than 10% of total net sales were derived from two customers as a percentage of net sales were 86 % for the three months ended June 30, 2023. Revenues from customers representing greater than 10% of total net sales were derived from one customer as a percentage of net sales were 86 % for the six months ended June 30, 2023.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 June 30, 2024, and 2023, the amounts earned from the subscription agreement were approximately $ 109,000 and $ 176,000 , respectively. For the six months ended June 30, 2024, and 2023, the amounts earned from the subscription agreement were approximately $ 349,000 and $ 394,000 , respectively. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations. On June 30, 2024, the Company had approximately $ 1,000 due to Stingray. On December 31, 2023, the Company had approximately $ 269,000 due from Stingray for music subscription reimbursement. During the three and six months ended June 30, 2024, the Company advanced $ 415,000 to SemiCab for working capital. As of June 30, 2024, the company had approximately $ 415,000 due from SemiCab. (See Note 2). NOTE 14 – ASSET ACQUISITION On June 11, 2024, the Company and its wholly owned subsidiary SemiCab,LLC, SemiCab, Inc., Ajesh Kapoor and Vivek Sehgal entered into the Asset Purchase Agreement pursuant to which the Seller agreed to sell and assign to the Company, and the Company agreed to purchase and assume from the Seller, substantially all the assets, and certain specified liabilities relating to the business of the Seller. On July 3, 2024, the parties completed the Asset Purchase Agreement whereby the Company issued to the Seller (i) 641,806 shares of the Company’s common stock with a value of approximately $ 738,000 (ii) a twenty percent ( 20 %) membership interest in SemiCab LLC. (See Note 2). Pursuant to the asset acquisition agreement, the Company and Seller entered into an option agreement (the “Option Agreement”), granting the Buyer the right to acquire all of the issued and outstanding capital securities of SMCB Solutions Private Limited, a wholly owned subsidiary of the Seller, in consideration for 320,903 shares of common stock of the Company. In connection with the asset acquisition agreement, effective July 3, 2024, SemiCab, LLC entered into employment agreements (the “Agreements”) with Ajesh Kapoor and Vivek Sehgal Kapoor’s agreement spans three years with an annual base salary of $ 140,000 for 2024, $ 240,000 for 2025, and $ 300,000 for subsequent years, and Sehgal’s agreement also spans three years with an annual base salary of $ 105,000 for 2024, $ 210,000 for 2025, $ 240,000 for 2026, $ 270,000 for 2027, and $ 300,000 for 2028. Both executives’ salaries are subject to annual review by the Board. They are eligible for annual performance-based bonuses contingent on specific goals set by the Board and will participate in the 2022 Equity Incentive Plan, receiving annual equity issuances and cash-based incentives tied to revenue milestones. Both are entitled to standard employee benefits, including health insurance and retirement plans. 15 The Singing Machine Company, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 and 2023 (Unaudited) Pro Forma Information The unaudited pro forma financial information below presents the effects of the Asset Purchase Agreement as though it had been completed on January 1, 2023. The pro forma adjustments are derived from the historically reported transactions of the respective companies. The pro forma results do not include anticipated combined effects or other expected benefits of the acquisition. The pro forma results for the six months ended June 30, 2024, and 2023 reflect the combined performance of the Company and the SemiCab business for that period. The unaudited pro forma information is based on available data and certain assumptions that the Company believes are reasonable given the circumstances. However, actual results may differ materially from the assumptions used in the accompanying unaudited pro forma financial information. This selected unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not intended to represent what the actual consolidated results of operations would have been had the Asset Purchase Agreement occurred on January 1, 2023, nor does it attempt to forecast future consolidated results of operations. SCHEDULE OF PRO FORMA FINANCIAL INFORMATION June 30, 2024 June 30, 2023 Six Months Ended June 30, 2024 June 30, 2023 Net revenue $ 6,209,000 9,530,000 Operating loss from continuing operations ( 9,350,000 ) ( 6,142,000 ) Net loss ( 9,690,000 ) ( 7,085,000 ) The pro forma results for the six months ended June 30, 2023, include a net increase in operating expenses of $ 265,000 , consisting of legal and accounting expenses of approximately $ 215,000 associated with the acquisition of SemiCab and $ 50,000 in shares of SMC common stock issued to Vivek Sehgal as sign-on bonus. 16