COMMITMENTS AND CONTINGENCIES

3 Months Ended

Jun. 30, 2011

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

NOTE 7 - COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

MGA ENTERTAINMENT, INC. v. THE SINGING MACHINE COMPANY, INC. (CENTRAL DISTRICT COURT OF CALIFORNIA, CASE CV 10-03761 DOC (RNBX) )

MGA Entertainment, Inc. (“MGA”) filed an action against the Company on April 16, 2010 alleging breach of contract, breach of implied covenant of good faith and fair dealing, and conversion claims relating to two licensing agreements between the parties entered into on May 10, 2006 and November 21, 2006. The two licensing agreements involved the manufacture, distribution and marketing of “Bratz” branded merchandise which is a proprietary brand of MGA.

The Company vigorously contested the charges and filed a countersuit against MGA on June 21, 2010 alleging breach of contract, failure of consideration for the licensing agreements, and other claims based on various state and federal laws.  Prior to the Company entering into the above license agreements with MGA, Mattel, a competitor to MGA, filed a complaint against MGA on or about April, 2005 alleging ownership to the “Bratz” concept.  The Mattel/MGA litigation was tried in phases however on or about February 2011, the courts ultimately ruled in favor of MGA with regards to ownership of the “Bratz” brand.

On July14, 2011 and subsequent to the quarter ended June 30, 2011, the Company participated in a mediation session with an independent mediator which resulted in a settlement agreement dated July 25, 2011.  This agreement calls for a payment in the amount of $245,000 to be made by the Company to MGA by August 11, 2011.  After considering advice of counsel, conducting risk analysis of potential future legal and administrative costs of litigation, and analysis of potential outcomes, Management believes that it was in the best interest of the Company to settle for the amounts proposed by the mediator.

Pursuant to the settlement agreement the Company has recorded an additional liability of approximately $160,000 in the current quarter ended June 30, 2011.  This additional accrual, which is included in selling expenses, when combined with the previously accrued liability of approximately $85,000 covers all amounts to be paid pursuant to this settlement.

INCOME TAXES

In a letter dated July 21, 2008 the Internal Revenue Service ("IRS") notified International SMC (HK) Limited “ISMC (HK)”, a former foreign subsidiary, of an unpaid tax balance on Income Tax Return of a Foreign Corporation (Form 1120-F) for the period ending March 31, 2003. According to the notice ISMC (HK) has an unpaid balance due in the amount of $241,639 that includes an interest assessment of $74,125.  ISMC (HK) was sold in its entirety by the Company on September 25, 2006 to a British Virgin Islands company (“Purchaser”).  The sale and purchase agreement with the Purchaser of ISMC (HK) specifies that the Purchaser would ultimately be responsible for any liabilities, including tax matters.  On June 3, 2009 the IRS filed a federal tax lien in the amount of approximately $170,000 against ISMC (HK) under ISMC (HK)’s federal Tax ID. On June 30, 2011 the IRS filed an updated  federal tax lien in the amount of approximately $293,000 against ISMC (HK) under ISMC (HK)’s federal Tax ID.  Management sought independent legal counsel to assess the potential liability, if any, on the Company.  In a memorandum from independent counsel, the conclusion based on the facts presented was that the IRS would not prevail against the Company for collection of the ISMC (HK) income tax liability based on:

· The IRS’s asserted position that the Company is not the taxpayer.

· The 1120- F tax liability was recorded under the taxpayer identification number belonging to ISMC and not the Company’s taxpayer identification number

· The IRS would be barred from recovery since it failed to assess or issue a notice of levy within the three year statute of limitations

Based on the conclusion reached in the legal memorandum, management does not believe that the Company will have any further liability and has not accrued any liability in this matter.

LEASES

The Company has entered into various operating lease agreements for office and warehouse facilities in Coconut Creek, Florida and City of Industry, California. The leases expire at varying dates. Rent expense for the three months ended June 30, 2011 and 2010 was $189,382 and $212,835, respectively.

In addition, the Company maintains various warehouse equipment and computer equipment operating leases. Future minimum lease payments under property and equipment leases with terms exceeding one year as of June 30, 2011 are as follows:

	Leases
For period ending
2012	$	510,728
2013		671,044
2014		57,384
	$	1,239,156