RIME 10-Q Quarter ended Sept. 30, 2023

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.

THE SINGING MACHINE COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 and 2022

(Unaudited)

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

THE SINGING MACHINE COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 and 2022

(Unaudited)

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).

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.

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:

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.

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.

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.

NOTE 9 – COMPUTATION OF EARNINGS PER SHARE

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.

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.