UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For quarter ended June 30, 2019

For the transition period from _____ to ______.

Commission File Number0 - 24968

THE SINGING MACHINE COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

6301 NW 5^th Way, STESuite 2900, Fort Lauderdale FL 33309

(Address of principal executive offices)

(954) 596-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer [  ]Accelerated filer [  ] Non-accelerated filer [  ] Smaller Reporting Company [X] Emerging growth company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]No [X]

APPLICABLE ONLY TO ISSUES INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicated by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [  ]No [  ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The Singing Machine Company, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to the condensed consolidated financial statements

The Singing Machine Company, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to the condensed consolidated financial statements

The Singing Machine Company, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF INCOMECASH FLOWS

(Unaudited)

See notes to the condensed consolidated financial statements

The Singing Machine Company, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY

For the three months ended June 30, 2019 and 2018

(Unaudited)

See notes to the condensed consolidated financial statementsstatements.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2018June 30, 2019

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

OVERVIEW

The Singing Machine Company, Inc., a Delaware corporation (the “Company”, “SMC”, “The Singing Machine”) and its three wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”) and SMC-Music, Inc.(“SMC-M”) are primarily engaged in the development, marketing, and sale of consumer karaoke audio systems, accessories, musical instruments and musical recordings. The products are sold by SMC to retailers and distributors for resale to consumers.

NOTE 2 - LIQUIDITY

The Company reported net income of approximately $1,290,000 and $1,473,000 for the three and nine months ended December 31, 2018, respectively as compared to net income of approximately $1,155,000 and $1,412,000 for the three and nine months ended December 31, 2017. The Company’s net income and cash flow continue to be affected by the Toys R Us bankruptcy as net sales decreased to approximately $19,452,000 and $45,594,000 for the three and nine months ended December 31, 2018, respectively from approximately $21,462,000 and $58,204,000 for the three and nine months ended December 31, 2017, respectively. Lost sales from Toys R Us of approximately $9,986,000 and a decrease in sales to one major customer of approximately $3,419,000 due to the elimination of one promotional product accounted for most of the decrease in sales for the nine months ended December 31, 2018. To assist with the Company’s cash requirements during fiscal 2019 our parent company agreed to continue to delay payment of related party trade debt as well as payments due on subordinated debt until the end of peak season when liquidity improves. Our parent company suspended a portion of monthly service and development fees totaling approximately $99,000 for six months commencing July 1, 2018 through December 31, 2018. Management believes that it has adequate cash available on its revolving credit facility to meet all obligations for the next twelve months. To assist the Company in remaining compliant with its revolving credit facility covenants, PNC Bank issued a third amendment and waiver in August 2018 to the Revolving Credit Facility and the Security Agreement in effect for fiscal 2019 amending the fixed charge coverage ratio and annual capital expenditure limits. While management continues to assess the long term effect of the Toys R Us bankruptcy, management is confident that the temporary suspension of payments on related party debt, suspension of service and development fees for six months, availability of cash from our revolving credit facility and significant efforts to reduce inventory levels during the current fiscal year will be adequate to meet the company’s liquidity requirements for the next twelve months.

NOTE 3-SUMMARYSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements. The accompanying unaudited financial statements for the three and nine months ended December 31,June 30, 2019 and 2018 and 2017 have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States 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 information as of March 31, 20182019 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018.2019. The interim condensed consolidated financial statements should be read in conjunction with that report.

USE OF ESTIMATES

The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Historically, past changes to these estimates have not had a material impact on the Company’s financial condition. However, circumstances could change which may alter future expectations.

COLLECTIBILITY OF ACCOUNTS RECEIVABLE

The Singing Machine’s allowance for doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be in an amount sufficient to respond to normal business conditions. Management sets 100% reserves for customers in bankruptcy and other reserves based upon historical collection experience.

The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2018

FOREIGN CURRENCY TRANSLATION

The functional currency of the Macau Subsidiary is the Hong Kong dollar. The financial statements of the subsidiary are translated to U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are recorded in the condensed consolidated statement of operations and translations are recorded in a separate component of shareholders’ equity. Any such amounts were not material during the periods presented.

Concentration of Credit Risk

At times, the Company maintains cash in United States bank accounts that are more than the Federal Deposit Insurance Corporation insured amounts. The Company also maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at December 31, 2018June 30, 2019 and March 31, 20182019 are approximately $1,596,000$577,000 and $54,000,$211,000, respectively.

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

INVENTORY

Inventories are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected future inventory returns due to warranty and allowance programs (See ADOPTION OF NEW ACCOUNTING STANDARDS).programs. As of December 31, 2018June 30, 2019 and March 31, 20182019 the estimated amounts for these future inventory returns were approximately $1,348,000$295,000 and $479,000,$599,000, respectively. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of December 31, 2018June 30, 2019 and March 31, 20182019 the Company had inventory reserves of approximately $223,000 and $280,000, respectively,$254,000 for estimated excess and obsolete inventory.

LONG-LIVED ASSETS

The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows attributable to the related assets are less than the carrying amount, the carrying amounts are reduced to fair value and an impairment loss is recognized in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using accelerated and straight-line methods.

FAIR VALUE OF FINANCIAL INSTRUMENTS

We follow FASB ASC 825, Financial Instruments, which requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.

The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses, refunds due to customers and due to/from related parties approximates fair value due to the relatively short period to maturity for these instruments. The carrying amounts on the bank term note payable, the subordinated debt to Starlight Marketing Development, Ltd. (related party) and capitalfinance leases approximate fair value due to the relatively short period to maturity and related interest accrued at a rate similar to market rates. The carrying amountsamount on the revolving line of credit approximates fair value due the relatively short period to maturity and related interest accrued at market rates.

REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS

The Company recognizes revenue in accordance with FASB ASC 606, “Revenue from Contracts with Customers” (See ADOPTION OF NEW ACCOUNTING STANDARDS). The Company’s contracts with customers consist of one performance obligation (the sale of the Company’s products). Revenue is recognized when the goods are delivered and control of the goods sold is transferred to the customer. The Company’s contracts have no financing elements, payment terms are less than 120 days and have no further contract asset or liability obligations once control of goods is transferred to the customer. Revenue is recorded in the amount of consideration the Company expects to receive for the sale of these goods.

Costs incurred in fulfilling contracts with customers include administrative costs associated with the procurement of goods which are included in general and administrative expenses, in-bound freight costs which are included in the cost of goods sold and accrued sales representative commissions which are included in selling expenses in the accompanying condensed consolidated statements of income. operations.

The Company disaggregates revenues by 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 (See NOTE 10)9).

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2018

The Company generally does not allow products to be returned other than return allowance programs for goods returned to the customer for various reasons and accordingly records a sales return reserve based on historic return amounts, specific events as identified and management estimates.

The Company’s reserve for sales returns were approximately $2,050,000$448,000 and $726,000$896,000 as of December, 2018June 30, 2019 and March 31, 2019, respectively.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

Revenue is derived from four different major product lines. Disaggregated approximate revenue from these product lines for the three months ended June 30, 2019 and 2018 respectively.consisted of the following:

SHIPPING AND HANDLING COSTS

Shipping and handling costs are performed by both the Company and third partythird-party logistics companies. Shipping and handling activities are performed before the customer obtains control of the goods sold to them and are considered activities to fulfill the Company’s promise to transfer the goods. These expenses are classified as a component of selling expenses in the accompanying condensed consolidated statements of operations.

STOCK BASED COMPENSATION

The Company follows the provisions of the FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the condensed consolidated statements of incomeoperations over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense for the three months ended June 30, 2019 and 2018 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award. For the three months ended June 30, 2019 and 2018, the stock option expense was approximately $5,000 and $11,000, respectively.

ADVERTISING

Costs incurred for producing and publishing advertising of the Company are charged to operations the first time the advertising takes place. The Company has entered into cooperative advertising agreements with its major customers that specifically indicatedindicate that the customer must spend the cooperative advertising fund upon the occurrence of mutually agreed events. The percentage of the cooperative advertising allowance ranges from 1% to 13% of the purchase. The customers must advertise the Company’s products in the customer’s catalog, local newspaper and other advertising media. The customer must submit the proof of the performance (such as a copy of the advertising showing the Company’s products) to the Company to request for the allowance. The customer does not have the ability to spend the allowance at their discretion. The Company believes that the identifiable benefit from the cooperative advertising program and the fair value of the advertising benefit is equal or greater than the cooperative advertising expense. Advertising expense for the three months ended December 31,June 30, 2019 and 2018 and 2017 was approximately $1,328,000$361,000 and $1,026,000, respectively. Advertising expense for the nine months ended December 31, 2018 and 2017 was approximately $2,877,000 and $2,650,000,$269,000, respectively. As of December 31, 2018June 30, 2019 and March 31, 2018,2019 there was an accrual for cooperative advertising allowances of approximately $1,019,000$184,000 and $207,000,$185,000, respectively. These amounts were a component of accrued expenses in the condensed consolidated balance sheets.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to results of operations as incurred. These expenses are shown as a component of selling, general and administrative expenses in the condensed consolidated statements of income. For the three months ended December 31,June 30, 2019 and 2018, and 2017, these amounts totaled approximately $27,000$5,000 and $40,000, respectively. For the nine months ended December 31, 2018 and 2017, these amounts totaled approximately $64,000 and $138,000,$16,000, respectively.

INCOME TAXES

The Company follows the provisions of FASB ASC 740 “Accounting for Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.

The Company analyzes its deferred tax assets and liabilities at the end of each interim period and, based on management’s best estimate of its full year effective tax rate, recognizes cumulative adjustments to its deferred tax assets and liabilities. On December 22, 2017For the Tax Act was enacted which reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Actthree months ended June 30, 2019 and 2018 we have estimated that our effective tax rate for the fiscal year endingto be approximately 21.5% and 23.9%, respectively. As of June 30, 2019 and March 31, 2019, will be approximately 22% The effective tax rate for the full year ended March 31, 2018 was approximately 28%. As of December 31, 2018 and March 31, 2018, The Singing Machine had gross deferred tax assets of approximately $515,000$997,000 and $937,000,$758,000, respectively. The Company recorded an income tax provisionbenefit of approximately $367,000$239,000 and $1,080,000$324,000 for the three months ended December 31,June 30, 2019 and 2018, and 2017, respectively. The Company recorded an income tax provision of approximately $422,000 and $1,221,000 for the nine months ended December 31, 2018 and 2017, respectively.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2018June 30, 2019

(Unaudited)

The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. As of December 31, 2018,June 30, 2019, there were no uncertain tax positions that resulted in any adjustment to the Company’s provision for income taxes. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company currently has no liabilities recorded for accrued interest or penalties related to uncertain tax provisions.

As of December 31, 2018, the Company is subject to U.S. Federal income tax examinations for the tax years ended March 31, 2016 and subsequent years.

COMPUTATION OF EARNINGSLOSS PER COMMON SHARE

IncomeLoss per common share is computed by dividing the net incomeloss by the weighted average of common shares outstanding during the period. As of December 31,June 30, 2019 and 2018 and 2017 total potential dilutive shares from common stock options amounted to approximately 2,350,0002,310,000 and 2,450,0002,430,000 shares, respectively. These shares were not included in the computation of diluted earnings per share for the three and nine months ended December 31,June 30, 2019 and June 30, 2018 and 2017.because their effect was anti-dilutive.

ADOPTION OF NEW ACCOUNTING STANDARDS

In May 2014, the FASB issued ASU 2014-09, Topic 606, “Revenue from Contracts with Customers”, (“ASC 606”) which outlines a single comprehensive model for companies to use when accounting for revenue arising from contracts with customers. The core principle of the revenue recognition model is that an entity recognizes revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company adopted ASC 606 on April 1, 2018 using the full retrospective approach with the application of the standard reflected in the prior year reporting period. After examining the Company’s performance obligations in its contracts, it was determined that there was no effect to the company’s retained earnings or net income during the periods reported. Management determined that most of the Company’s customers (other than distributors) have “customer acceptance rights” in that customers are allowed to return defective goods within a specified period after shipment (generally between 6 and 9 months) after goods have been shipped. Prior to adoption of ASC 606, the Company recognized a liability for the estimated net amount of sales less the estimated net realizable value of expected returned goods at the time of sale. The liability for estimated return goods was approximately $247,000 at March 31, 2018 and was reported in warranty provisions on the consolidated balance sheet. The adoption of ASC 606 required that the net realizable value of estimated return goods be disaggregated from estimated sales return reserves and reported as a current asset and the amount of estimated sales amount to be credited to customers be recognized in current liabilities on the consolidated balance sheet. As a result of the adoption of ASC 606 the net realizable value of estimated returned goods of approximately $479,000 was reclassified to inventory on April 1, 2018 on the condensed consolidated balance sheet. Estimated sales amounts to be credited to customers due to inventory warranty and allowance programs of approximately $726,000 was reported in reserve for sales returns on the consolidated balance sheet on April 1, 2018. (Refer to Note 4 - INVENTORY and Note 12 - RESERVE FOR SALES RETURNS)

The following table shows the financial line items that were affected by the adoption of ASC 606:

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, Topic 842, as amended, “Leases”.The ASU requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2018 On April 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its disclosures for the comparative periods. (See Note 6– LEASES).

The new standardCompany determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date. The liability is effectiveequal to the present value of the remaining minimum lease payments. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). As the interest rate implicit in the Company’s operating leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The Company utilizes the implicit rate for usits finance leases.

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which supersedes most of the prior accounting guidance on April 1, 2019nonemployee share-based payments, and instead aligns it with early adoption permitted.existing guidance on employee share-based payments. We expect to adoptadopted the new standard on its effective date. A modified retrospective approach is required, applying the newApril 1, 2019. The adoption of this standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application.

We expect that this statement willdid not have a material effect on ourthe Company’s condensed consolidated financial statements. While we continue to assess all

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326). This ASU represents a significant change in the current accounting model by requiring immediate recognition of management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which delayed recognition of expected losses that might not yet have met the threshold of being probable.The amendments in ASU 2016-03 are effective for fiscal years beginning after April 1, 2020 including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of adoption, we currently believe the most significant affects relate to the recognition of new ROU assets and lease liabilitiesthis updated guidance on our balance sheet for our operating leasesconsolidated financial statements and providing significant new disclosures about our leasing activities.related disclosures. Management does not believe that the adoption of ASU 2016-03 will have any material effect on the Company’s financial statements.

NOTE 4-3 - INVENTORIES, NET

Inventories are comprised of the following components:

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

NOTE 5 -4 – PROPERTY AND EQUIPMENT NET

A summary of property and equipment is as follows:

Depreciation expense for the three months ended December 31,June 30, 2019 and June 30, 2018 and December 31, 2017 was approximately $64,000$59,000 and $67,000, respectively. Depreciation expense for the nine months ended December 31, 2018 and December 31, 2017 was approximately $200,000 and $153,000$68,000, respectively.

NOTE 65 – BANK FINANCING

Revolving Credit Facility

On June 22, 2017, the Company renewed the existing revolving credit facility (the “Revolving Credit Facility”) with PNC Bank, National Association (“PNC”) for an additional three years expiring on July 15, 2020. The outstanding loan balance cannot exceed $15,000,000 during peak selling season between August 1 and December 31 (with the ability of the Company to request an additional $5,000,000 of availability during peak selling season if required) and is reduced to a maximum of $7,500,000 between January 1 and July 31. At December 31, 2018June 30, 2019 and March 31, 2018, the2019, there was an outstanding balance of approximately $627,000 and $0 on the Revolving Credit Facility. In connection with the Company’s Revolving Credit Facility, was approximately $2,931,000 and $0, respectively.cash collected by PNC Bank on trade accounts receivable may exceed amounts borrowed on the revolving credit facility from time to time. As of DecemberJune 30, 2019 and March 31, 20182019, PNC Bank owed the Company $0 and approximately $2,237,000 respectively, which represented cash received by PNC Bank on accounts receivable in excess of amounts borrowed against the revolving credit facility. As of June 30, 2019, there was approximately $4,435,000$6,873,000 available to borrow on the Revolving Credit Facility. Usage under the Revolving Credit Facility shall not exceed the sum of the following (the “Borrowing Base”):

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2018

The Revolving Credit Facility includes the following sub-limits:

The Revolving Credit Facility must comply with the following quarterly financial covenants to avoid default:

On August 2, 2018, PNC issued a third amendment and waiver (“third amendment”) to the Revolving Credit Facility, the Security Agreement in effect for fiscal 2019. The third amendment waived existing violations of the fixed charge coverage ratio of 1.1:1 and increased maximum capital expenditures from $300,000 to $375,000 per fiscal year. The Company incurred an amendment fee of $10,000 upon execution of the agreement.

The Revolving Credit Facility must comply with the following quarterly financial covenants to avoid default:

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

Interest on the Revolving Line of Credit is accrued at .75% per annum over PNC’s announced prime rate with an option for the Company to elect the 1, 2 or 3 month fully absorbed PNC LIBOR Rate plus 2.75% per annum with a default rate of 2% over the applicable rate. There is an unused facility fee equal to .375% per annum on the unused portion of the Revolving Credit Facility which will be calculated on the basis of a 360 day year for the actual number of days elapsed and will be payable quarterly in arrears. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred interest expense of approximately $100,000$1,000 and $114,000, respectively, on amounts borrowed against the Revolving Credit Facility. During the nine months ended December 31, 2018 and 2017, the Company incurred interest expense of approximately $155,000 and $188,000$5,000, respectively, on amounts borrowed against the Revolving Credit Facility. During the three months ended December 31,June 30, 2019 and 2018, and 2017, the Company incurred an unused facility fee of approximately $8,000 and $6,000, respectively on the unused portion of the Revolving Credit Facility. During the nine months ended December 31, 2018 and 2017, the Company incurred an unused facility fee of approximately $23,000 and $20,000 respectively$7,000 on the unused portion of the Revolving Credit Facility.

The Revolving Line of Credit is secured by first priority security interests in all of the named borrowers’ tangible and intangible assets as well as first priority security interests of 100% of member or ownership interests of any of its domestic existing or newly formed subsidiaries and first priority lien on up to 65% of the borrowers’ foreign subsidiary’s existing or subsequently formed or acquired foreign subsidiaries. The Revolving Credit Facility is also secured by a related-party debt subordination agreement with Starlight Marketing Development, Ltd. in the amount of approximately $815,000. Costs associated with renewal of the Revolving Credit Facility of approximately $40,000 were deferred and are being amortized over the term of the agreement. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred amortization expense of approximately $3,000 associated with the amortization of deferred financing costs from the original Revolving Credit Facility. During the nine months ended December 31, 2018 and 2017, the Company incurred amortization expense of approximately $10,000 and $28,000, respectively.

Term Note Payable

In connection with the amendments above and in addition to the maximum availability limits on the Revolving Line of Credit, the agreement also includes a two-year term note (“Term Note”) in the amount of $1,000,000 the proceeds of which were used to pay down a portion of the subordinated related party debt of approximately $1,924,000 in June 2017. The term note bearsbore interest at 1.75% per annum over PNC’s announced prime rate or 1, 2, or 3 month PNC LIBOR Rate plus 3.75%. The term note iswas payable in quarterly installments of $125,000 plus accrued interest. The outstanding balance on the Term Note was $250,000$0 and $625,000$125,000 as of December 31, 2018June 30, 2019 and March 31, 2018,2019, respectively. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred interest expense of approximately $3,000$0 and $10,000, respectively. During the nine months ended December 31, 2018 and 2017 the Company incurred interest expense of approximately $20,000 and $17,000$9,000, respectively.

The subordination agreement has beenwas amended reducing the amount of related party subordinated debt to the remaining amount due of approximately $815,000. Provision has also been made to allow repayment of the remaining $815,000 in quarterly installments of $123,000 including interest accrued at 6% per annum commencing September 30, 2017. Payments of $123,000 are only permitted upon receipt of the Company’s quarterly compliance certificate; the Company having met the mandatory pay-down of the Revolving Credit Facility to $1,000,000 and average excess availability for the prior 30 days (after subtraction of third party trade payables 30 days or more past due) of no less than $1,000,000 after giving effect to the payment. As part of the Conditions to Installment Payment of the subordinated debt, payments not made under this note that cannot be made as a result of the foregoing prohibition shall not be deemed an Event of Default and can be made as soon as the Company is able to demonstrate that it meets the liquidity requirements defined above. TheQuarterly installment paymentpayments of $123,000 due on December 31,the last day of each fiscal quarter have not been made since September 2017 March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 were not made due to the Toys R Us bankruptcy’s unfavorable effect on cash flow.Company not meeting these requirements. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred interest expense of approximately $4,000$2,000 and $12,000,$9,000, respectively on the related party subordinated debt. During the nine months ended December 31, 2018 and 2017 the Company incurred interest expense of approximately $20,000 and $26,000 respectively on the related party subordinated debt.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2018

NOTE 76 - COMMITMENTS AND CONTINGENCIES

LEASES

Operating Leases

We have operating lease agreements for offices and a warehouse facility in Florida, California and Hong Kong expiring in various years through 2024.

We entered into an operating lease agreement, effective October 1, 2017, for the corporate headquarters located in Fort Lauderdale, Florida where we lease approximately 6,500 square feet of office space. The lease expires on March 31, 2024. The base rent payment is approximately $8,800 per month, subject to annual adjustments.

We entered into an operating lease agreement, effective June 1, 2013, for 86,000 square feet of warehouse space in Ontario, California for our logistics operations. The lease expires on August 31, 2020 (original lease term of 87 months). The base rent payment is approximately $43,700 per month for the remaining term of the lease. The lease provides for a renewal option to extend the lease term for 5 years at the fair market value at the time of renewal.

We entered into an operating lease agreement, effective May 1, 2018, for 424 square feet of office space in Macau, Hong Kong. The rent is fixed at approximately $1,600 per month for the duration of the lease which expires on April 30, 2021. The lease provides for a renewal option to extend the lease.

Lease expense for our operating leases is recognized on a straight-line basis over the lease terms.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

Finance Leases

On May 25, 2018 and June 4, 2018, we entered into two long-term capital leasing arrangements with Wells Fargo Equipment Finance (“Wells Fargo”) to finance the leasing of two used forklift vehicles in the amount of approximately $44,000. The leases require monthly payments in the amount of $1,279 per month over a total lease term of 36 months which commenced on June 1, 2018. The agreement has an effective interest rate of 4.5% and the Company has the option to purchase the equipment at the end of the lease term for one dollar.

On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance a new Enterprise Resource Planning (“ERP”) System project over a term of 60 months at a cost of approximately $375,000. We estimate the system to be placed in service on April 1, 2020. Upon approval by Company management, Dimension will release progress payments directly to the project consultants as specific project milestones are met. Total progress payments will be made to the vendor over a period of approximately nine months and the Company will only be charged financing costs on the amounts released to the vendor. The financing agreement calls for estimated monthly installment payments of approximately $7,257 (including principal and interest) and bears interest of approximately 6.22%. As of June 30, 2019, no funds had yet been released.

Supplemental balance sheet information related to leases as of June 30, 2019 is as follows:

Supplemental statement of income information related to leases for the three months ended June 30, 2019 is as follows:

Supplemental cash flow information related to leases for the three months ended June 30, 2019 is as follows:

Lease term and Discount Rate

Scheduled maturities of operating and finance lease liabilities outstanding as of June 30, 2019 are as follows:

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

LEGAL MATTERS

Management is currently not aware of any legal proceedings.proceedings other than matters that arise in the ordinary course of business.

OPERATING LEASESNOTE 7 - STOCK OPTIONS

The Company has operating lease agreements for office and warehouse facilities in Fort Lauderdale, Florida; Ontario, California; and Macau expiring at varying dates. Rent expense forDuring the three months ended December 31,June 30, 2019 and 2018 and 2017 was approximately $180,000 and $177,000, respectively. Rent expense for the nine months ended December 31, 2018 and 2017 was approximately $530,000 and $500,000, respectively. In addition, the Company maintains various warehouse equipmentissued 100,000 stock options at an exercise price of $.38 and office equipment operating leases. Future minimum lease payments under property and equipment leases with terms exceeding one year$.55, respectively; to directors as of December 31, 2018 are as follows:compensation for their service.

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the assumptions outlined below. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees.

NOTE 8 - STOCK OPTIONS

A summary of stock option activity for the ninethree months ended December 31, 2018June 30, 2019 is summarized below:

The following table summarizes information about employee stock options outstanding at December 31, 2018:June 30, 2019

* Total number of options outstanding as of June 30, 2019 includes 560,000 options issued to five current and two former directors as compensation and 1,150,000 options issue to key employees that were not issued from the Plan.

NOTE 9 -8 – COMMON STOCK ISSUANCES

On August 1, 2018,June 12, 2019, the Company issued 22,72532,890 shares of its common stock to ourits Board of Directors at $0.55$0.38 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2018.2019. The Company recorded director compensation of $0 and $12,500 respective during the three and nine months ended December 31, 2018.June 30, 2019.

On August 3, 2018 the Company issued 80,000 shares of its common stock to a former director who exercised 80,000 stock options at an average option price of $.08 per share. Accordingly, the Company received $6,400 from the former director for the execution of the transaction.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2018

NOTE 109 - GEOGRAPHICAL INFORMATION

Sales to customers outside of the United States for the three and nine months ended December 31,June 30, 2019 and 2018 and 2017 were primarily made by the Macau Subsidiary.Subsidiary in US dollars. Sales by geographic region for the periods presented are as follows:

The geographic area of sales iswas based primarily on the location where the product is delivered.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

NOTE 11 – RELATED10 –RELATED PARTY TRANSACTIONS

All transactions listed below are related to the Company as they are all with affiliates of our Chairman of the Board, Mr. Phillip Lau.

DUE TO/FROM RELATED PARTIES

On December 31, 2018June 30, 2019 and March 31, 2018,2019, in the aggregate the Company had approximately $1,673,000$368,000 and $1,157,000,$289,000, respectively, due from related parties for goods and services sold to these companies.

On December 31, 2018June 30, 2019 and March 31, 2018,2019, the Company had amounts due to other related party companiesparties in the amounts of approximately $707,000$101,000 and $414,000$0 for engineering fees, storage and administrative services provided to the Company by these related parties.

SUBORDINATED DEBT

In connection with the Revolving Credit Facility the Company was required to subordinate related party debt to Starlight Marketing Development, Ltd. (“subordinated debt”) in the amount of approximately $1,924,000. The Revolving Credit Facility renewal agreement included a Term Note in the amount of $1,000,000, the proceeds of which were used to pay down a portion of the subordinated debt. The remaining subordinated debt of approximately $924,000 bears interest at 6% and is scheduled to be paid in quarterly installments of $123,000 which include interest and commenced September 30, 2017. The remaining amount due on the subordinated debt of approximately $815,000 was classified as a current liability as of DecemberJune 30, 2019 and March 31, 20182019 on the condensed consolidated balance sheets. The subordinated debt was classified as a current portion of approximately $690,000 and a long-term portion of $125,000 as of March 31, 2018 on the condensed consolidated balance sheets. TheQuarterly installment payments of $123,000 due on December 31, 2017, March 31, 2018, June 30, 2018,the last day of each fiscal quarter have not been made since September 30, 2018 and December 31, 2018 were not made due to the Toys R Us bankruptcy’s unfavorable effect on cash flow.2017. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred interest expense of approximately $4,000$2,000 and $12,000,$9,000, respectively on the related to the subordinated debt. During the nine months ended December 31, 2018 and 2017 the Company incurred interest expense of approximately $20,000 and $26,000, respectively, related to theparty subordinated debt.

TRADE

During the three months ended December 31,June 30, 2019 and June 30, 2018 and December 31, 2017 the Company sold approximately $33,000$74,000 and $0, respectively to Winglight Pacific, Ltd. (“Winglight”), a related party, at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for the three months ended December 31,June 30, 2019 and 2018 and December 31, 2017 was 23.1%21.7% and NA, respectively. During the nine months ended December 31, 2018 and December 31, 2017 the Company sold approximately $1,183,000 and $1,462,000, respectively to Winglight at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for the nine months ended December 31, 2018 and December 31, 2017 was 30.0% and 21.8%, respectively. The product was shipped to Cosmo Communications of Canada (“Cosmo”), another related company and the Company’s primary distributor of its products to Canada. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of income.operations.

During the three months ended December 31,June 30, 2019 and 2018 and December 31, 2017 the Company sold approximately $16,000$71,000 and $210,000,$45,000, respectively of product to Cosmo from its California warehouse facility. During the nine months ended December 31, 2018 and December 31, 2017 the Company sold approximately $655,000 and $533,000, respectively of productdirectly to Cosmo from its California warehouse facility. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of income.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2018operations.

The Company incurred service expenses from Starlight Electronics Co, Ltd, (“SLE”) a related party. The services from SLE for the three monthsmonth periods ended December 31,June 30, 2019 and 2018 and 2017 were approximately $87,000$101,000 and $131,000, respectively. The purchases from SLE for the nine months ended December 31, 2018 and 2017 were approximately $268,000 and $270,000, respectively. These amounts were included as a component of cost of goods sold in the accompanying condensed consolidated statements of income.

The Company purchased services from Merrygain Holding Co. Ltd, (“Merrygain”) a related party. The purchases from Merrygain for the three three months ended December 31, 2018 and 2017 were approximately $0 and $39,000, respectively. The purchases from Merrygain for the nine months ended December 31, 2018 and 2017 were approximately $38,000 and $115,000,$96,000, respectively. These amounts were included as a component of general and administrative expenses in the accompanying condensed consolidated statements of income.operations.

NOTE 1211 – RESERVE FOR SALES RETURNS

A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are either allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months) or granted a “defective allowance” consisting of a fixed percentage (between 1% and 5%) off of invoice price in lieu of returning defective products.. 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.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

Changes in the Company’s reserve for sales returns are presented in the following table:

* The reserve for sales returns atNOTE 12 – REFUNDS DUE TO CUSTOMERS

Due to the beginningseasonality of the period ended December 30,2017 has been adjustedbusiness and length of time customers are given to reflectreturn defective product, it is not uncommon for customers to accumulate credits from the full retrospective adoptionCompany’s sales and allowance and cooperative advertising programs that are in excess of ASC 606 effective April 1, 2018.unpaid invoices in accounts receivable. All credit balances in customers’ accounts receivable are reclassified to refunds due to customers in current liabilities on the condensed consolidated balance sheets. Customer requests for payment of a credit balance are reclassified from refunds due to customers to accounts payable on the condensed consolidated balance sheets. When new invoices are processed prior to settlement of the credit balance and the customer accepts settlement of open credits with new invoices, then the excess of new invoices over credits are netted in accounts receivable. As of June 30, 2019 and March 31, 2019, refunds due to customers reclassified from accounts receivable were approximately $300,000 and $31,000, respectively.

NOTE 13 - EMPLOYEE BENEFIT PLANS

The Company has a 401(k) plan for its employees to which the Company makes contributions at rates dependent on the level of each employee’s contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to operations for contributions to this plan and administrative costs during the three months ended December 31,June 30, 2019 and 2018 and 2017 totaled approximately $18,000$14,000 and $15,000, respectively. The amounts charged to operations for contributions to this plan and administrative costs during the nine months ended December 31, 2018 and 2017 totaled approximately $51,000 and $39,000,$16,000, respectively. The amounts are included as a component of general and administrative expense in the accompanying condensed consolidated statements of income.operations. The Company does not provide any post-employment benefits to retirees.

NOTE 14 – SUBSEQUENT EVENTS- CONCENTRATIONS OF CREDIT AND SALES RISK

On January 29,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 are concentrated with several large customers. At June 30, 2019, the Company signed a three-year worldwide licensing agreement with CBS (NYSE: CBS) for the CARPOOL KARAOKE program series. Under the terms87% of the Agreement, Singing Machine will be launching a range of consumer products worldwide designed for use within vehicles under the CARPOOL KARAOKE license. The license agreement began December 1, 2018 and continues through September 30, 2022. The license requires a minimum royalty guaranty of $100,000 with $50,000 payable at the execution of the contract, and a second and third payment of $25,000 payable on or before June 1, 2021 and 2022, respectively. Royalty payments will be calculated at 9% of net sales up to the first 150,000 units; andaccounts receivable were due from two customers in North America that individually owed over 10% of net sales 150,001 units thereafter and are payable on a quarterly basis beginning September 30, 2019.

NOTE 15 – CONCENTRATION OF SALES RISKtotal accounts receivable. At March 31, 2019, 62% of accounts receivable were due from three customers in North America that individually owed over 10% of total accounts receivable.

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 ninethree months ended December 31, 2018,June 30, 2019, there were fivetwo 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 37%, 14%, 13%, 12%80% and 10%15%, respectively. For the ninethree months ended December 31, 2017,June 30, 2018, 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 35%33%, 17%24% and 12%13%, respectively. In September, 2017, Toys R US (which accounted for approximately 17% of our sales for the nine months ended December 31, 2017) filed for bankruptcy protection and conversion to liquidation in April 2018. The loss of this customer had a significant impact on the financial performance of the Company during the nine months ended December 31, 2018.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this quarterly report. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See Part II, Item 1A, “Risk Factors ”)“). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements.

Statements included in this quarterly report that do not relate to present or historical conditions are called “forward-looking statements.” Such forward-looking statements involve known and unknown risks and uncertainties and other factors that could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions. Words such as “believes,” “forecasts,” “intends,” “possible,” “estimates,” “anticipates,” “expects,” “plans,” “should,” “could,” “will,” and similar expressions are intended to identify forward-looking statements. Our ability to predict or project future results or the effect of events on our operating results is inherently uncertain. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved.

Important factors to consider in evaluating such forward-looking statements include, but are not limited to: (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) the effects of adverse general economic conditions, both within the United States and globally, (v) vendor price increases and decreased margins due to competitive pricing during the economic downturn (vi)various competitive market factors that may prevent us from competing successfully in the marketplace and (vii) other factors described in the risk factors section of our Annual Report on Form 10-K, this Quarterly Report on 10-Q, or in our other filings made with the SEC.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

OVERVIEW

The Singing Machine Company, Inc., a Delaware corporation (the “Company”, “SMC”, “The Singing Machine”) and its three wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”) and SMC-Music, Inc.(“SMC-M”) are primarily engaged in the development, marketing, and sale of consumer karaoke audio systems, accessories, musical instruments and musical recordings. The products are sold by SMC to retailers and distributors for resale to consumers.

Our products are sold throughout North America, Europe, Australia and South Africa primarily through major mass merchandisers and warehouse clubs, on-line retailers and to a lesser extent department stores, lifestyle merchants, direct mail catalogs and showrooms, music and record stores, and specialty stores.

Representative customers include Amazon, Best Buy, BJ’s Wholesale, Costco, Sam’s Club, Target, JC Penney and Wal-Mart. Our business has historically been subject to seasonal fluctuations causing our revenues to vary from quarter to quarter and between the same periods in different fiscal years. Our products are manufactured for the most part based on the purchase indications of our customers. We are uncertain of how significantly our business would be harmed by a prolonged economic recession, but we anticipate that continued contraction of consumer spending would negatively affect our revenues and profit margins.

Sales of consumer electronics and toy products in the retail channel are highly seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season, which includes Christmas. A substantial majority of our sales occur during the second quarter ending September 30 and the third quarter ending December 31. Sales in our second and third quarter, combined, accounted for approximately 94% and 89% of net sales in fiscal 2019 and 2018, respectively.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items related to our condensed consolidated statements of incomeoperations as a percentage of net sales for the three months ended June 30, 2019 and nine months ended December 31, 2018 and 2017:2018: