| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION The
accompanying condensed consolidated financial statements include the accounts of the Company, its Macau Subsidiary, SMH, SMCL, and SMCM.
All inter-company accounts and transactions have been eliminated in consolidation for all periods presented. The accompanying unaudited
financial statements for the three months ended June 30, 2023 and 2022 have been prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”) applicable to interim financial information and the requirements of
Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information
and disclosures required by US GAAP for complete consolidated financial statements. In
the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals)
necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations.
The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected
for the full year. The condensed consolidated balance sheet information as of March 31, 2023 was derived from the audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023. 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 statements. However, circumstances could change which may alter future expectations. COLLECTABILITY
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 THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June
30, 2023 and 2022 (Unaudited) FOREIGN
CURRENCY TRANSLATION The
functional currency of SMH 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 statements of operations and translations would be recorded in
a separate component of shareholders’ equity. Any such amounts were not material during the periods presented. SMC
sells to distributors and retailers in the Canadian market, and is paid in Canadian dollars. We receive payment in the form of the
Canadian dollar, simultaneously presenting these payments for deposit and requesting an immediate spot conversion by the financial
institution that currently holds our operating accounts. Net gains and losses resulting from foreign exchange transactions are
recorded in the statements of operations and translations would be 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 as of June 30, 2023 and March 31, 2023 were approximately $ 23,000 and
$ 174,000 ,
respectively. Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist of accounts receivable. 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. As of June 30, 2023 and March 31, 2023, the estimated amounts for these
future inventory returns were approximately $ 116,000 555,000 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 June 30, 2023 and March 31, 2023, the Company had inventory reserves of approximately $ 710,000 900,000 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.” No During
the first quarter ended June 30, 2023, we decided not to renew our lease on our California warehouse facility and have opted to
transfer our logistics operations to a third-party logistics company and all assets located at this facility will be sold or
otherwise disposed of by the end of August 2023. We recognized accelerated depreciation expense on certain assets to be sold in the
amount of approximately $ 122,000 THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June
30, 2023 and 2022 (Unaudited) LEASES The
Company follows FASB ASC 842, “Leases”. The ASC requires lessees to recognize leases on the balance sheet and disclose key
information about leasing arrangements. The 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 are classified as finance
or operating, with classification affecting the pattern and classification of expense recognition in the income statement. (See Note
8– LEASES). The
Company determines if an arrangement contains a lease at the inception of a contract. ROU 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. ROU assets and lease liabilities are recognized at the commencement date. The liability is equal 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 financing interest rate for its finance leases. 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, due from related parties,
accounts payable, accrued expenses, customer deposits and refunds due to customers, approximates fair value
due to the relatively short period to maturity for these instruments. The carrying amounts on the finance leases and
installment notes approximate fair value either due to the relatively short period to maturity or the related interest is accrued at
a rate similar to market rates. The carrying amounts 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”. All revenue is generated
from contracts with customers. The Company recognizes revenue when the control of the goods sold is transferred to the customer, in an
amount, referred to as the transaction price, that reflects the consideration to which the Company is expected to be entitled in exchange
for those goods. The Company determines revenue recognition utilizing the following five steps: (1) identification of the contract with
a customer, (2) identification of the performance obligations in the contract (promised goods or services that are distinct), (3) determination
of the transaction price, (4) allocation of the transaction price to the performance obligations, and (5) recognition of revenue when,
or as, the Company transfers control of the product or service for each performance obligation. The
Company selectively participates in a retailer’s co-op promotion incentives to maximize sales of the Company’s products on
the retail floor or to assist in developing consumer awareness of new product launches, by providing marketing fund allowances to our
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, 2023 and 2022, co-op promotion incentives were approximately
$ 91,000 296,000 THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June
30, 2023 and 2022 (Unaudited) The
Company’s contracts with customers consist of one performance obligation (the sale of the Company’s products). 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 are included in
general and administrative expenses, in-bound freight costs are included in the cost of goods sold and accrued sales representative commissions
are included in selling expenses in the accompanying condensed consolidated statements of operations as our underlying customer agreements
are less than one year. While
the Company has no overstock return privileges in its vendor agreements with its customers, the Company does provide for variable consideration
contingent upon the occurrence of uncertain future events. Variable consideration is estimated at the expected value or at the most likely
amount depending on the type of consideration. Estimated amounts are included in the transaction price to the extent it is probable that
a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration
is resolved. The
Company estimates variable consideration under our return allowance programs for goods returned from the customer for various
reasons, whereby a sales 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, 2023 and March 31, 2023 were approximately $ 332,000 900,000 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 (See NOTE 10 – SEGMENT INFORMATION). Revenue
is derived from five different major product lines. Disaggregated revenue from these product lines for the three months ended June 30,
2023 and 2022 consisted of the following: SCHEDULE
OF DISAGGREGATION OF REVENUE
T hree Months Ended
Product Line June 30, 2023 June 30, 2022
Karaoke Machines $ 1,463,000 $ 8,159,000
Microphones and Accessories 957,000 2,420,000
SMC Kids Toys 21,000 936,000
Licensed Products 8,000 45,000
Music Subscriptions 176,000 132,000
Total Net Sales $ 2,625,000 $ 11,692,000 SHIPPING
AND HANDLING COSTS 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. For the three months ended June 30, 2023 and 2022, shipping and handling expenses
were approximately $ 60,000 46,000 THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June
30, 2023 and 2022 (Unaudited) 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 stock-based payments to employees including grants of employee stock options, be measured at fair value and expensed
in the condensed consolidated statements of operations 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, 2023 and
2022 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, 2023 and 2022, the stock option expense was approximately $ 63,000 16,000 RESEARCH
AND DEVELOPMENT COSTS Research
and development costs are charged to results of operations as incurred. These expenses are shown as a component of general and administrative
expenses in the condensed consolidated statements of operations. For the three months ended June 30, 2023 and 2022, these amounts totaled
approximately $ 42,000 17,000 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. As of June 30, 2023, and March 31, 2023, the Company
had recognized a valuation allowance of the entire net deferred tax asset as management has determined it was more likely than not
that the deferred tax asset would be realized. 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% As
of June 30, 2023 and March 31, 2023, 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. THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June
30, 2023 and 2022 (Unaudited) COMPUTATION
OF EARNINGS PER SHARE Computation
of dilutive shares for the three months ended June 30, 2023 and 2022 are as follows: SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNING PER SHARE
For the three For the three
Basic weighted average common shares outstanding 3,872,447 1,911,485
Effect of dilutive stock options - -
Diluted weighted average of common shares outstanding 3,872,447 1,911,485 Basic
net income (loss) per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted
net income (loss) per share reflects the potential dilution assuming shares of common stock were issued upon the exercise of outstanding
in-the-money options and the proceeds thereof were used to purchase shares of the Company’s common stock at the average market
price during the period using the treasury stock method. For
the three months ended June 30, 2023, options to purchase 108,343 902,113 For
the three months ended June 30, 2022, options to purchase 50,007 924,334 RECENT
ACCOUNTING PRONOUNCEMENTS In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326) |
