8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 19, 2012

THE SINGING MACHINE COMPANY, INC.

(Exact name of registrant as specified in its charter)

Delaware	0-24968	95-3795478
(State or other jurisdiction	(Commission File Number)	(IRS Employer
of incorporation)		Identification No.)

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

(Address of principal executive offices and Zip Code)

Registrant's telephone number, including area code (954) 596-1000

Copies to:

Gary Atkinson, Esq.

Chief Executive Officer

6301 NW 5^th Way, Suite 2900

Fort Lauderdale, FL 33309

954-596-1000 (phone)

954-596-2000 (fax)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement.

On October 19, 2012, the Company executed a two-year Accounts Receivable Ledgered Line of Credit Facility (“line of credit”) with Crestmark Bank (“Crestmark”) of Troy, Michigan which allows the company to receive and advance of up to 70% of qualified accounts receivable. The outstanding loan balance on the line of credit cannot exceed $5,000,000 during our peak selling season between August 2 and February 14 and cannot exceed $500,000 between February 15 and August 1 of each year the agreement is in effect. The Company has agreed to assign all of its domestic accounts receivable shipped from North America (except drop shipment invoices) to Crestmark and will assume all of the credit risk on accounts receivable assigned to Crestmark.

Interest on the line of credit and discounting charges on accounts receivable advances will be charged at a rate of 2% per annum over the prime rate as published by the Wall Street Journal and at no time shall the effective rate be less than 5.25% per annum. The credit facility is secured with all assets of the Company as well as related-party debt subordination agreements totaling $2,500,000 from Ram Light Management, Ltd. in the amount of $1,683,247 and Starlight Marketing Development, Ltd. in the amount of $816,753. The factoring fees will be 1% of the gross invoice for all domestic accounts receivable assigned. There were no outstanding obligations on the line of credit facility as of September 30, 2012 and March 31, 2012.

Item 9.01 Financial Statements and Exhibits.

(a) Exhibits.

Exhibit Number	Description
99.1	(Filed herewith). Loan and Security Agreement
99.2	(Filed herewith). Schedule to Loan and Security Agreement
99.3	(Filed herewith). Promissory Note
99.4	(Filed herewith). Subordination Agreement with Ram Light Management
99.5	(Filed herewith). Subordination Agreement with Starlight Marketing

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	THE SINGING MACHINE, COMPANY, INC.
Date: November 1, 2012	/s/ Gary Atkinsn
	Gary Atkinson
	Chief Executive Officer

EX-99.1

LOAN AND SECURITY AGREEMENT

(“Agreement”)

This Agreement dated _______________________, 2012, is an agreement between CRESTMARK BANK, a Michigan banking corporation (“Crestmark”), and THE SINGING MACHINE COMPANY, INC., a Delaware corporation and SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA, a Macau corporation (individually or collectively referred to herein as “Borrower”). In this Agreement, Crestmark and Borrower are collectively the “Parties”. Any person who guarantees the obligations of Borrower (each a “Guarantor”) is required to sign this Agreement. The Parties have the addresses shown on the schedule (“Schedule”) which is attached to this Agreement. These are the addresses of the Parties for all purposes and may be changed by one party giving notice to the other party in writing of the new address.

1.          PURPOSE. The purpose of this Agreement, including the Schedule, is to set forth the terms and conditions of the loan from Crestmark to Borrower (“Loan”) and the obligations of Borrower. The Schedule is part of this Agreement. The promissory note (“Note”) to be signed by Borrower, any guaranty(s), and any other documents now or hereafter signed by any of the Parties in connection with this Agreement, the Loan or any document issued by Crestmark or the bank holding the lockbox (“Lockbox Bank”), including subordination agreements or intercreditor agreements, are also all part of this Agreement. All of the documents together are referred to collectively as the “Loan Documents”.

2.          LOAN; LOAN ADVANCES.

A.        Any disbursement of money or advance of credit by Crestmark, including but not limited to amounts advanced for the payment of interest, fees, expenses and amounts necessary to protect, maintain and preserve Crestmark’s Collateral under the Loan Documents (“Protective Disbursements”), is referred to collectively as an “Advance”. Whether Crestmark makes an Advance is in Crestmark’s sole discretion. If an Advance is made, it will be made in accordance with the advance formula set forth in the Schedule (“Advance Formula”); but not at any time to exceed the maximum amount set forth on the Schedule (“Maximum Amount”). Crestmark may choose to make Protective Disbursements in excess of the Maximum Amount or Advance Formula in its sole discretion. Each time Crestmark makes an Advance, including a Protective Disbursement, the Advance will be debited against an account in Borrower’s name on Crestmark’s books (“Loan Account”), and each payment will be credited against the Loan Account in the manner described in this Agreement.

B.        The total amount Borrower owes to Crestmark will be the aggregate of the Advances made by Crestmark, the expenses and fees set forth in the Schedule and any and all costs incurred by Crestmark (including reasonable attorney’s fees), and interest at the rate set forth in the Note on all amounts advanced (together with all other obligations of Borrower under the Loan Documents, the “Obligations” or “Indebtedness”).

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C.        Borrower must repay all Advances with respect to the Loan with interest, which is due monthly as specified in the Note, along with all other fees and expenses of Crestmark set forth herein or in the Schedule. Crestmark may in its sole discretion collect any Obligations due Crestmark by (i) directly applying any funds in the Lockbox Account, as defined in paragraph 5 below, to the Obligations (ii) directly applying funds from any reserve to the Obligations, (iii) collecting the Obligations directly from Borrower; or (iv) otherwise collecting the Obligations. Borrower understands that all the Obligations are repayable at any time in full or in part upon demand by Crestmark. Crestmark may make demand for partial payments and such demand will not preclude Crestmark from demanding payment in full at any time.

D.        Borrower must comply with its representations, promises, covenants and reporting requirements set forth in this Agreement, in the Schedule and in the other Loan Documents. Borrower’s failure to do any of the foregoing is a default (“Default”). The demand nature of the Obligations is not modified by reference to a Default in this Agreement or the other Loan Documents and any reference to a Default is for the purpose of permitting Crestmark to exercise its remedies for Default, including charging interest at the Extra Rate provided in the Note.

E.       The aggregate amount of all Advances, plus the expenses and fees set forth in the Schedule, any and all costs incurred by Crestmark (including reasonable attorney’s fees), and interest at the rate set forth in the Note on all amounts advanced (the “Loan Amount”), may not, at any time, exceed the Maximum Amount or the Advance Formula, and Borrower understands that if at any time it should owe more to Crestmark than the lesser of the Maximum Amount or the Advance Formula (the “Overformula”) it must repay that amount immediately, whether or not demand to repay the whole of the Obligations has been made. Protective Disbursements must be immediately repaid whether or not an Overformula exists.

3.          RESERVES. If Crestmark believes in its sole discretion that the prospect for repayment of the Obligations is impaired or that its Collateral margin is insufficient, Crestmark may establish cash reserves and credit balances to protect its interests and the repayment of the Obligations. The reserve may be established by reducing the Advance Formula to achieve the target reserve level, withholding monies due Borrower from any payments Crestmark receives, from a cash payment from Borrower or any other method Crestmark chooses. Any money in a reserve account, whether or not it is a cash reserve, will not earn interest for Borrower, and Crestmark may apply the funds in the reserve account to reduce the Obligations at any time Crestmark elects.

4.          FEES AND EXPENSES. In connection with the Loan there are several types of fees that may be charged and Borrower may be required to maintain a minimum Loan balance. Such fees and requirements are set forth in the Schedule. In addition, all expenses of every kind incurred by Crestmark in connection with the Loan, any Advance, collection of the Obligations, inspection, and examination are to be paid by Borrower.

5.           LOCKBOX. Borrower must immediately notify all persons who are obligated on accounts (“Account Debtors”) to direct all Account Debtors and any other person or party that is liable to Borrower (collectively a “Debtor”) to remit all payments due Borrower to the lock box address or pursuant to the wire transfer or ACH instructions set forth in the Schedule (the “Lockbox Account”). The remit to address on all documents related to the accounts, including invoices, purchase orders, or contracts (“Documents”) must be the Lockbox Account. At Crestmark’s request, all Documents must be marked by Borrower to show assignment to Crestmark, and Borrower must notify each Account Debtor by mail that the Account has been assigned to Crestmark and that all payments on the Account, whether made by mail or electronically or otherwise must be made payable to Borrower or Crestmark, at Crestmark’s sole discretion, to the Lockbox Account or other address provided by Crestmark in writing. The language used in such notices shall be approved by Crestmark in writing. Crestmark may at any time and from time to time, and at its sole discretion, notify any Debtor or third party payee to make payments payable directly to Crestmark or to notify Debtor of the assignment to Crestmark. All expenses for notification of each Account Debtor will be paid by Borrower.

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If notwithstanding the notice to Debtors, Borrower receives any funds from a Debtor, including any cash, checks, drafts or wire transfers from the collection, enforcement, sale or other disposition of the Collateral (defined below), whether derived in the ordinary course of business or not, or if Borrower receives any proceeds of insurance, tax refunds or any and all other funds of any kind, Borrower shall hold such funds in trust for Crestmark, shall not mix such funds received with any other funds, and shall immediately deposit such funds in the Lockbox Account in the form received. That means if the funds are received by mail, the Debtor checks will be sent to the Lockbox Account uncashed, and if the funds are received electronically, the funds will be transferred immediately to the Lockbox Account electronically. Crestmark will have sole possession and control over the Lockbox Account. The Lockbox Bank will process all deposits and Borrower has no right to the Lockbox Account, it belongs to Crestmark. Crestmark is the owner of all deposits in the Lockbox Account, and has no duty as to collection or protection of funds as long as it is not grossly negligent or commits actual fraud. All expenses plus any applicable administration and servicing fees of the Lockbox Account will be paid by Borrower.

6.          LOAN ACCOUNT. All of the Obligations which are owed by Borrower will be shown in the Loan Account and Borrower will receive a monthly statement either by mail, electronically or via access to the Crestmark online system at Crestmark’s sole discretion. The statement is binding on Borrower unless Borrower provides a written objection to Crestmark that is actually received by Crestmark within fifteen (15) business days of the time the statement is provided or made available to Borrower.

7.          PAYMENTS. Should a check or other credit instrument not be collected after Borrower has been given credit for such payment, then the credit will be reversed and a fee charged at Crestmark’s then standard rate. Crestmark, at its sole discretion, may establish reserves as set forth above or not apply a payment that it reasonably believes may be returned unpaid for any reason or disgorged due to a preference claim or garnishment, and in such event the Maintenance Fee (as defined in the Schedule) will still be payable. In the event that any payment received by Crestmark is sought to be recovered by or on behalf of the payer (including a trustee in bankruptcy or assignee for the benefit of creditors), then Borrower agrees to immediately reimburse Crestmark on demand for any amount so recovered and all of Crestmark’s expenses in connection with any such proceeding, including reasonable attorneys’ fees. This provision shall survive termination of this Agreement. Any payments received by Crestmark shall be applied to the Obligations in whatever order Crestmark determines in its reasonable discretion.

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8.          SECURITY INTEREST.

A.        Borrower grants to Crestmark a security interest in all of its assets, now existing or hereafter arising, wherever located including all Accounts, Goods, Inventory, Equipment, Chattel Paper, Instruments, Investment Property, specifically identified Commercial Tort Claims, Documents, Deposit Accounts, Letter of Credit Rights, General Intangibles, Contract Rights, customer lists, furniture and fixtures, books and records and supporting obligations for any of the foregoing, and all Proceeds of the foregoing (the “Collateral”), to secure repayment of the Obligations (“Security Interest”). The Collateral also includes all monies on deposit with Crestmark, or on deposit in the Lockbox Account. All capitalized terms used in this Section 8A. which are not otherwise defined shall have the meanings assigned to them in the Uniform Commercial Code as adopted in the State of Michigan (the “UCC”). Without limiting the forgoing, “Accounts” will also mean and include any and all other forms of obligations now owed or hereafter arising or acquired by the Borrower evidencing any obligation for payment for goods of any kind, nature, or description sold or leased or services rendered, and all proceeds of any of the foregoing.

B.       Borrower gives Crestmark all of the rights of a secured party under the UCC. Borrower grants Crestmark the authority to file all appropriate documentation for Crestmark to perfect its security interest in the Collateral, including a UCC-1 financing statement listing the Collateral as “All assets of the Debtor, now existing and hereafter arising, wherever located,” or similar terms, as well as UCC-3 amendments as may be required from time to time. All expenses of Crestmark relating to searching, filing or protecting the Security Interest are part of the Obligations.

C.       The Security Interest gives Crestmark rights with respect to the Collateral and the Security Interest and this Agreement imposes duties upon Borrower which relate to the Collateral. Some of the rights and duties are: (i) the right of Crestmark at any time to notify any persons who may hold any part of the Collateral, such as Account Debtors and other debtors, of Crestmark’s Security Interest. Borrower understands that Crestmark may verify Accounts with the Account Debtors; (ii) Borrower must cooperate with Crestmark in obtaining control of any Collateral in the possession of third persons, particularly Collateral consisting of deposit accounts, investment property, letter of credit rights or other Collateral which is evidenced by electronic entries; (iii) except for the right of Borrower to sell its inventory in the ordinary course of business, Borrower shall not sell or transfer any of the Collateral or grant any other security interest in the Collateral, except as Crestmark may specifically agree to in writing. Borrower remains liable to perform all of its obligations with respect to the Collateral such as the recognition of any warranties in inventory sold and Crestmark is under no responsibility to perform any of the obligations of Borrower; and (iv) Borrower must notify Crestmark immediately if it knows that any Account Debtor disputes an Account whether or not such disputes are deemed valid by Borrower.

9.           POWER OF ATTORNEY. Borrower irrevocably appoints Crestmark, or any person(s) designated by Crestmark, as its attorney-in-fact, which appointment is coupled with an interest and shall remain in full force and effect until all Obligations of Borrower to Crestmark have been fully satisfied and discharged, with full power, at Borrower’s sole expense, to exercise at any time in Crestmark’s reasonable discretion all or any of the following powers:

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A.        Receive, take, endorse, assign, deliver, accept and deposit, in the name of Crestmark or Borrower, any and all cash, checks, commercial paper, drafts, remittances and other instruments and documents relating to the Collateral or the proceeds thereof.

B.        Change Borrower’s address on all invoices and statements of Account mailed or to be mailed to Borrower’s customers and to substitute thereon the address designated by Crestmark, to place legends on all invoices and statements of Account mailed or to be mailed to Borrower’s customers, and to receive and open all mail addressed to Borrower, or to Borrower’s trade name at Crestmark’s address, or any other designated address.

C.       Upon and after the occurrence of a Default, to change the address for delivery of Borrower’s mail to Crestmark’s or an address designated by Crestmark. Borrower specifically authorizes Crestmark to sign any forms on behalf of Borrower to affect this change with the United States Postal Service or any third party and requests such change to be accepted.

D.       Upon and after the occurrence of a Default, to take or bring, in the name of Crestmark or Borrower, all steps, actions, suits or proceedings deemed by Crestmark necessary or desirable to effect collection of or other realization upon any Collateral.

E.       Execute on behalf of Borrower any UCC-l and/or UCC-3 Financing Statement(s) and/or any notices or other documents necessary or desirable to carry out the purpose and intent of this Agreement, and to do any and all things reasonably necessary and proper to carry out the purpose and intent of this Agreement.

F.        To transfer any lockboxes belonging to Borrower to Crestmark at Crestmark’s sole discretion.

G.       To initiate ACH transfers from Borrower’s depository accounts.

H.       To endorse and take any action with respect to bills of lading covering any inventory.

I.         Upon and after a Default, or at any time in the event that Borrower fails to do so within a reasonable time, execute, file and serve, in its own name or in the name of Borrower, mechanics lien or similar notices, or claims under any payment or performance bond for the benefit of Borrower.

J.         Upon and after a Default, or at any time in the event that Borrower fails to do so within a reasonable time, pay any sums necessary to discharge any lien or encumbrance on the Collateral, which sums shall be included as Obligations hereunder, and which sums shall accrue interest at the Extra Rate until paid in full.

10.        REPRESENTATIONS. Borrower makes the following representations and warranties to Crestmark and such representations and warranties must be true at all times until the Obligations are paid in full. If Borrower learns that a representation and warranty once made is no longer true, it has the duty to immediately notify Crestmark in writing:

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A.       Borrower is in good standing under the laws of the state of its organization and is authorized to conduct business in any state that it conducts business. Borrower has the power and authority to enter into this Agreement, and the persons signing this Agreement and all persons who sign any documents with Crestmark have the appropriate authority. Borrower’s organization identification number, state of organization, and addresses where it conducts business are as shown on the Schedule.

B.       Borrower’s entry into the Loan Documents do not violate any agreement which Borrower has or which binds Borrower.

C.       The Loan Documents are fully enforceable against Borrower and the Collateral.

D.       There are no litigation or criminal charges pending or threatened against Borrower or Guarantor and neither Borrower nor Guarantor are in default of any order or judgment of any court or any governmental agency of any kind. There are no unsatisfied liens or judgments pending against Borrower in any jurisdiction except as shown on the Schedule.

E.       The financial information furnished by Borrower and Guarantor to Crestmark has been prepared in accordance with generally accepted accounting principles, all financial statements are true and correct, and any projections of the business operations of Borrower that have been given or will be given to Crestmark in the future will be based upon Borrower’s reasonable assumptions and estimates.

F.       Borrower is the owner of all of the Collateral and there are no other liens or claims against the Collateral, except the Security Interest of Crestmark or as shown on the Schedule.

G.       All of the Collateral is personal property and none of the Collateral will be permanently affixed to real estate.

H.       Borrower has filed and will file all federal, state, local and foreign tax returns that it is required to file and has paid and will pay all taxes and all other governmental charges as they become due.

I.       Borrower is able to pay its debts as they become due and has sufficient capital to carry on its business. Borrower’s obligations under this Agreement and the Loan Documents, including the obligation to repay the Loan and the grant of the Security Interest, do not render Borrower insolvent.

J.       Borrower only uses the fictitious names, d/b/a’s, tradenames and tradestyles set forth on the Schedule (collectively the “Tradenames”), and Borrower certifies that all sales and any and all business done in the name of the Tradenames are the sales and business of Borrower. Any and all checks, remittances or other payments received in the name of any of the Tradenames are Borrower’s sole and exclusive property, and are subject to Crestmark’s security interest hereunder. Any and all authority given to Crestmark by Borrower in this Agreement or elsewhere to endorse Borrower’s name on any checks, negotiable instruments or other remittances extends with equal and full force and effect to any checks, negotiable instruments, and other remittances received in the name of any Tradename.

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K.       All Accounts assigned to Crestmark by Borrower are and will at all times be bonafide accounts arising from the sale of inventory or providing services, and are not subject to discounts, deductions, allowances, contra items, offset or counterclaim and are free and clear of all encumbrances of any kind whatsoever, except as disclosed to Crestmark in writing and approved by Crestmark in writing.

L.       Borrower’s assignment of any Accounts to Crestmark pursuant to this Agreement will not at any time violate any federal, state and/or local law, rule or regulation, court or other governmental order or decree or terms of any contract relating to such Accounts.

M.       Borrower possesses all necessary trademarks, trade names, copyrights, patents, patent rights and licenses to conduct its business as now operated, without any known conflict with any trademarks, trade names, copyrights, patents and license rights of any other person or entity.

N.       Borrower’s legal name as of the date hereof as it appears in its official filing with its state of organization is as set forth in the opening paragraph of this Agreement. Borrower has not organized another entity or Tradename using Borrower’s name or Tradename as set forth herein in any other jurisdiction.

O.       As to all of Borrower’s Inventory and Equipment:

i.       The Inventory and Equipment are currently located only at the locations identified on the Schedule, or such other locations as consented to by Crestmark in writing;

ii.       All Inventory is now and at all times hereafter shall be of good and merchantable quality, free from defects, except as disclosed to Crestmark in writing;

iii.     The Inventory and Equipment are and shall remain free from all liens, claims, encumbrances, and security interests (except as held by Crestmark, and except as identified on the Schedule).

iv.     The Inventory is not now stored with a bailee, warehouseman or similar party provided however, at Crestmark's sole discretion, such Inventory may be deemed eligible upon such party entering into a waiver letter in form satisfactory to Crestmark.

11.      BORROWER’S PROMISES. Borrower makes the following promises to Crestmark and these promises are effective until the Obligations are fully paid:

A.       To pay all Obligations when due and perform all terms, conditions and obligations of the Loan Documents.

B.       To permit Crestmark, or its representatives, access to the Collateral on Borrower’s premises or wherever collateral is located and to Borrower’s computer systems, books of account and financial records. Borrower will pay the cost of Field Examinations as specified in the Schedule.

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C.       To notify Crestmark promptly of any litigation, administrative or tax proceeding or other action threatened or instituted against Borrower or Guarantor or its property, or of any other material matter which may adversely affect Borrower’s financial condition. The amount of claims as to which Borrower must notify Crestmark is specified in the Schedule as the “Borrower Claims Threshold”.

D.       To pay when due all taxes, assessments and governmental charges, provided that Borrower has the right to contest the same as long as it has a cash reserve with Crestmark in an amount as determined by Crestmark in its sole discretion.

E.       To comply with the Financial Covenants described in the Schedule (if applicable).

F.       To maintain insurance on its business activities in such amount and in such form as Crestmark may from time to time require, and with respect to such insurance if so designated, Crestmark shall be named as “Lender Loss Payee” under the policy and receive evidence of the insurance. All insurance which protects Crestmark shall have at least a 30-day notice to Crestmark prior to any cancellation. With respect to the insurance, Borrower appoints Crestmark as its attorney-in-fact exercisable after an event of Default to negotiate any and all claims under all insurance policies and Crestmark also has the power to negotiate any payments on the insurance policies. Required insurance is listed on the Schedule.

G.       To comply with all laws, ordinances and regulations or other requirements of any governmental authority or agency applicable to Borrower’s business.

H.       To maintain and preserve all Collateral in good repair, working order and condition, and with respect to accounts, pursue collections thereof.

I.       To provide Crestmark with evidence of ownership of any Collateral upon the request of Crestmark.

J.       To maintain a Loan Amount balance which shall not exceed the sum of Eligible Collateral times the corresponding Advance Rate.

K.       To immediately reduce the Obligations to the applicable Maximum Amount on the date that the Maximum Amount changes.

12.       NEGATIVE COVENANTS. Borrower agrees until the Obligations are paid in full, it will not without prior written consent of Crestmark:

A.       Change its state of organization or its name, or move its executive office or at any time adopt any assumed name without giving Crestmark at least 30 days prior written notice.

B.       Declare or pay any dividend or make any other distribution with regard to its equity or purchase or retire any of its equity without Crestmark’s prior written consent, provided if it is taxed as an S Corporation or other “pass through” entity, Borrower may prior to a Default distribute profits to its equity holders in an amount necessary to enable such holders to pay personal, state and federal taxes directly attributable to the profits earned by Borrower for such year.

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C.       Make any loan or guaranty or assume any obligation or liability, whether as borrower, guarantor, surety, indemnitor or otherwise (a “Borrower Obligation”) (i) that would result in or create a Default, or (ii) that together with all other existing Borrower Obligations would exceed the “Borrower Obligation Threshold” set forth in the Schedule, without Crestmark’s prior written consent, provided, however, that Borrower may be the borrower under the loans described in those Subordination Agreement(s) that may be entered into in favor of Crestmark, upon terms and conditions acceptable to Crestmark, and the Borrower may make such payments, if any, as permitted under the terms and conditions of such Subordination Agreements.

D.       Enter into any transaction with its equity holders or any affiliates of Borrower except on terms at least as favorable as would be usual and customary in similar transactions if the person with whom the transaction is entered into was not related to Borrower.

E.       Release, redeem, purchase, or acquire any of its equity interests without the prior written consent of Crestmark.

F.       Default in the payment of any debt to any other person.

G.       Suffer or permit any judgment, decree or order not fully covered by insurance to be entered against Borrower or a Guarantor in an aggregate amount in excess of the “Claims Threshold” set forth in the Schedule, or permit or suffer any warrant or attachment to be filed against Borrower, any Guarantor, or against any property or asset of Borrower or Guarantor.

H.       Transfer the ownership of any interest in Borrower without the prior written consent of Crestmark which shall not be unreasonably withheld.

I.       Sell any of the Collateral outside the normal course of its business without the prior written consent of Crestmark.

J.       Purchase the stock or assets of any other entity without the prior written consent of Crestmark.

K.        Make any loans, advances, intercompany transfers or cash flow between the Borrower and any officer, director, employee, shareholder, subsidiary, related entity or affiliate of the Borrower or with any company that has common shareholders, officers or directors with the Borrower, except for Related Parties and Other Related Parties

13.      FINANCIAL REPORTS. Borrower promises that until the Obligations are fully paid and this Agreement is terminated, it will keep its books and records in a manner satisfactory to Crestmark and Crestmark will have the right at any time to verify any of the Collateral, documentation or books and records of Borrower in whatever manner and as often as Crestmark deems necessary. Borrower will permit Crestmark, or its representatives, access to the Collateral and Borrower’s premises and to Borrower’s computer systems, books of account and financial records. Borrower will furnish to Crestmark the financial reports identified on the Schedule, certified to by the president or chief financial officer of Borrower and Borrower’s certified public accountant, if applicable. All financial reports will be prepared in accordance with generally acceptable accounting principles and will be true and accurate.

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14.      CRESTMARK’S REMEDIES. Crestmark has all the remedies available at law or in equity (including those under the UCC) in the event of a Default or if Borrower fails to pay the Obligations on demand, including but not limited to the following: to charge the Extra Rate; to notify Account Debtors to make the payments directly to Crestmark; to settle or compromise any disputed Account, sue on any Account and make any agreement to deal with the Accounts as if it were the owner; to offset any of Borrower’s or Guarantor’s funds under the control of Crestmark against the Obligations; and to require Borrower to gather up the Collateral and make it available to Crestmark for Crestmark to conduct public or private UCC foreclosure sales. Borrower grants to Crestmark a license or other right to use, without charge, Borrower’s labels, patents, copyrights, trademarks, rights of use of any name, trade secrets, tradenames and advertising materials, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral, and Borrower’s rights under all licenses and franchise agreements shall inure to Crestmark’s benefit. If Crestmark should proceed against the Collateral and sell any of the Collateral on credit, Borrower will be credited on the Obligations only with the amount actually received by Crestmark and Borrower waives any and all provisions as to notice or a particular method of sale of any of the Collateral. Borrower will pay all expenses in connection with the assembly or sale of the Collateral. Crestmark does not have to incur its own expenses in realizing upon the Collateral, but all the expenses are for the account of Borrower. Borrower recognizes that at no time is Crestmark its agent in dealing with the Collateral, but Crestmark acts only in its own interest.

15.      CUMULATIVE RIGHTS. Crestmark’s rights and remedies under this Agreement and all other agreements shall be cumulative. Crestmark shall have all other rights and remedies not inconsistent herewith as provided under the UCC, by law, or in equity. No exercise by Crestmark of one right or remedy shall be deemed an election, and no waiver by Crestmark of any Default on Borrower’s part shall be deemed a continuing waiver. No delay by Crestmark shall constitute a waiver, election or acquiescence by it.

16.      LENDER ACTIONS. To the extent applicable law may impose duties on Crestmark to exercise remedies in a commercially reasonable manner, Borrower agrees that it is not commercially unreasonable for Crestmark: to fail to exercise remedies against any Collateral or any particular Account Debtor; to proceed against Account Debtors either directly or through collection agencies; to advertise disposition of Collateral through publications or media of general circulation; to hire professional auctioneers to dispose of Collateral; to dispose of Collateral in wholesale or retail markets; to disclaim warranties with respect to Collateral; or to obtain services of attorneys or other professionals. The foregoing is not an exhaustive list and nothing contained in the foregoing shall be construed to grant any rights to Borrower or to impose any duties on Crestmark that would not have been granted or imposed by this Agreement or by applicable law in the absence of this Section 16. Borrower agrees that under no circumstances is Crestmark the agent or representative of Borrower.

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17.      APPLICATION OF PROCEEDS. Once collection efforts are commenced by Crestmark, any proceeds of sale or disposition of Collateral may be applied by Crestmark first to expenses authorized by this Agreement, including Crestmark’s reasonable attorneys’ fees, which Borrower must pay, and the balance to payment of the Obligations in such manner as Crestmark may elect. Borrower and Guarantor remain liable for any deficiency.

18.      NOTICES. Any notice is effective by either party if sent in writing or facsimile with confirmation of receipt or by certified mail or personal delivery or expedited mail services to the addresses shown on the Schedule. In addition, the Borrower consents to Crestmark sending the Borrower other communications via electronic mail and/or facsimile.

19.      MISCELLANEOUS PROVISIONS.

A.       This Agreement is binding upon and is for the benefit of Borrower and Crestmark, and their respective successors and assigns. However, under no circumstances may Borrower assign this Agreement or its rights and duties hereunder. Crestmark may assign this Agreement and its rights under the Loan Documents and Borrower will make payments to any such assignee if so directed.

B.       Crestmark has the right at any time to assign, transfer, negotiate or sell participations in this Agreement or the Obligations or the rights of Crestmark hereunder. In connection with any assignment, Borrower consents to disclosure of any and all books, records, files, Loan Documents and all other documents in the possession or under the control of Crestmark.

C.       No delay or failure of Crestmark in exercising any right or remedy will affect such right or remedy. No delay or failure of Crestmark to demand strict adherence to the terms of this Agreement will be deemed to waive Crestmark’s rights to demand such adherence at any time in the future.

D.       The term “including” means “including, without limitation”, and the term “includes” means “includes, without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall.” The definitions of terms in this Agreement shall apply equally to the singular and plural forms of the terms defined.

E.       This Agreement and the other Loan Documents will be interpreted and determined under the laws of the State of Michigan without any regard to any conflict of laws provisions.

F.       Borrower, at Crestmark’s request, will make, execute and acknowledge any and all further instruments or agreements necessary to carry out the intent of this Agreement and the other Loan Documents.

G.       This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if all signatures were upon the same instrument. Delivery of an executed counterpart of the signature page to this Agreement by facsimile or electronic mail shall be effective as delivery of a manually executed counterpart of this Agreement, and any party delivering such an executed counterpart of the signature page to this Agreement by facsimile or electronic mail to any other party shall thereafter also promptly deliver a manually executed counterpart of this Agreement to such other party, provided that the failure to deliver such manually executed counterpart shall not affect the validity, enforceability, or binding effect of this Agreement.

THE SINGING MACHINE COMPANY, INC. 11 v3

H.       Neither Crestmark nor its affiliates, directors, officers, agents, attorneys or employees are liable to Borrower or Guarantor or affiliates for any action taken or omitted by it or any of them under the Loan Documents except for such liability as may be imposed by law for gross negligence or actual fraud, and no claim shall be made by Borrower or Guarantor or any of Borrower’s affiliates, directors, officers, agents, or employees for any special or consequential damages or punitive damages arising out of, or related to the Loan Documents or the transactions between the Parties.

I.       This Agreement and the other Loan Documents represent the complete Agreement between the parties with respect to the subject matter of this Agreement, and there are no promises, undertakings, representations or warranties by Crestmark relative to the subject matter of this Agreement not expressly set forth in this Agreement or the other Loan Documents. This Agreement and the other Loan Documents may be amended only in writing.

J.       If any provision of this Agreement is in conflict with any law or statute or is otherwise unenforceable, then the provision will be deemed null and void only to the extent of such provision and the provision will be deemed severable and the remainder of this Agreement shall be in full force and effect.

K.       Any payment made to Crestmark by either Borrower or Guarantor which is subsequently invalidated, declared fraudulent or preferential or otherwise set aside under any bankruptcy, state, federal or equitable law, then to the extent of such invalidity such payment will be deemed not to have been made and the obligation will continue in full force and effect. This provision shall survive termination of this Agreement.

L.       No Lien Termination Without Release In recognition of among other things, Borrower’s indemnification obligations and Crestmark’s right to have its attorneys’ fees and other expenses incurred in connection with this Agreement secured by the Collateral, notwithstanding payment in full of all Obligations by Borrower, Crestmark shall not be required to record any terminations or satisfactions of any of its liens on the Collateral unless and until Borrower and all guarantors of its obligations have executed and delivered to Crestmark a general release in a form acceptable to Crestmark in its sole discretion. Borrower understands that this provision constitutes a waiver of its rights Borrower may have under §9-513 of the UCC.

M.       Small Business Jobs Act Certification Pursuant to Section 4107(d)(2) (the “Section”) of the Small Business Jobs Act of 2010, certification is required from any business receiving a loan using funds received by the institution under the Small Business Lending Act. As required by the Section, the Borrower hereby certifies to Crestmark that the principals of Borrower and its affiliates have not been convicted of, or pleaded nolo contendre to, a sex offense against a minor (as such terms are defined in section 111 of the Sex Offender Registration and Notification Act (42 U.S.C. 16911)).

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The term “principals” is defined as follows: if a sole proprietorship, the proprietor; if a partnership, each managing partner and each partner who is a natural person and holds a 20% or more ownership interest in the partnership; and if a corporation, limited liability company, association or a development company, each director, each of the five most highly compensated executives or officers of the entity, and each natural person who is a direct or indirect holder of 20% or more of the ownership stock or stock equivalent of the entity.

N.       USA Patriot Act Notification The following notification is provided to Borrower pursuant to Section 3265 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318:

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person or entity that opens an account, including any deposit account, treasury management account, loan or other extension of credit. We may ask for the name, address, date of birth, and other information that will allow us to identify all Borrowers, principals and owners. We may also ask to see your driver’s license or other identifying documents.

20.       RIGHT OF FIRST REFUSAL. In consideration of Crestmark entering into this Agreement and making advances to Borrower, Borrower hereby agrees that it will, within five (5) days of receipt, provide a copy of any proposal letter, term sheet, letter of intent or commitment letter from any lender offering to Borrower a refinance of the Obligations. Crestmark shall have the right of first refusal to match the offer(s) of such other lender(s), and if Crestmark advises Borrower that it intends to meet the financial and operational terms set forth in such offers (but continuing to require that the loan be repayable on Demand) , Borrower will be obligated to enter into an amendment to this Agreement extending the terms of this Agreement for at least the term proposed in such other offer(s), and amending the financial and operational terms as set forth in this Agreement. Notwithstanding the foregoing, Borrower recognizes that this Agreement can only be terminated as provided herein. Failure of Crestmark to meet the terms set forth in such letter of interest or commitment letter does not relieve the Borrower from its obligations hereunder.

21.       INDEMNIFICATION. Borrower hereby agrees to indemnify, defend and hold Crestmark and its executive committees, parent affiliates, subsidiaries, agents, directors, officers, participants, employees, agents and their successors and assigns (collectively “Indemnified Parties”) harmless against any and all liabilities of any kind, nature or description and damages whether they are direct, indirect or consequential, including attorney’s fees and other professionals and experts incurred or suffered directly or indirectly by Indemnified Parties or asserted against Indemnified Parties by anyone whosoever, including Borrower or Guarantor, which arise out of the Loan Documents or the relationship and transaction between the Parties. This provision shall survive the termination of this Agreement.

22.       JOINT AND SEVERAL OBLIGATIONS. If more than one person or entity is named as Borrower in this Agreement, all Obligations, representations, warranties, covenants and indemnities of Borrower set forth herein and in the other Loan Documents shall be the joint and several obligations of such persons and/or entities.

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23.       JURISDICTION. BORROWER AND GUARANTOR AGREE THAT ANY ACTION TO ENFORCE BORROWER’S OR GUARANTOR’S OBLIGATIONS TOCRESTMARK SHALL BE PROSECUTED EITHER IN THE CIRCUIT COURT OF OAKLAND COUNTY MICHIGAN OR THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN (UNLESS CRESTMARK, IN ITS SOLE DISCRETION, ELECTS SOME OTHER JURISDICTION), AND BORROWER AND GUARANTOR SUBMIT TO THE JURISDICTION OF ANY SUCH COURT SELECTED BY CRESTMARK. BORROWER AND GUARANTOR WAIVE ANY AND ALL RIGHTS TO CONTEST THE JURISDICTION AND VENUE OF ANY ACTION BROUGHT IN THIS MATTER AND BORROWER AND GUARANTOR MAY BRING ANY ACTION AGAINST CRESTMARK ONLY IN THE CIRCUIT COURT FOR THE COUNTY OF OAKLAND OR THE FEDERAL COURT OR THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN.

24.       WAIVER. ALL PARTIES, INCLUDING BORROWER AND GUARANTOR EACH KNOWINGLY AND VOLUNTARILY WAIVE ANY CONSTITUTIONAL RIGHT TO A TRIAL BY JURY WITH RESPECT TO ANY CLAIM, DISPUTE OR CONFLICT BETWEEN THE PARTIES OR UNDER THE LOAN DOCUMENTS AND AGREE THAT ANY LITIGATION SHALL BE HEARD BY A COURT OF COMPETENT JURISDICTION SITTING WITHOUT A JURY. BORROWER AND GUARANTOR ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY TO REVIEW THE EFFECT OF THIS PROVISION WITH COUNSEL OF THEIR CHOICE.

25.       RELEASE. BORROWER AND GUARANTOR RELEASE AND FOREVER DISCHARGE CRESTMARK, ITS AFFILIATES, OFFICERS, AGENTS, EMPLOYEES AND DIRECTORS FROM ANY AND ALL CLAIMS OF ANY KIND WHATSOEVER FROM THE BEGINNING OF TIME TO DATE OF THIS AGREEMENT.

The parties have executed this Agreement as of the date and year first written above.

(Signatures on next page)

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CRESTMARK:
CRESTMARK BANK, a Michigan banking corporation
By:
Its:
BORROWER:
THE SINGING MACHINE COMPANY, INC.
a Delaware corporation
By:	Gary Atkinson
Its:	CEO
SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA
a Macau corporation
By:	Carol Chu Lan Lau
Its:	Director

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EX-99.2

SCHEDULE TO LOAN AND SECURITY AGREEMENT

DATED: _________________, 2012

This Schedule is part of the Agreement between:

CRESTMARK BANK (“CRESTMARK”)

5480 CORPORATE DRIVE, SUITE 350

TROY, MICHIGAN 48098

ATTN: Gayle Finger

FACSIMILE #:(248) 641-5101

AND

THE SINGING MACHINE COMPANY, INC.

6301 N.W. 5^TH WAY, SUITE 2900

FT. LAUDERDALE, FL 33309

ATTN: Gary Atkinson

FACSIMILE #:(954) 596-2000

and

SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA

ALAMEDA DR. CARLOS D’ASSUMPCAO

181-187 EDIFICIIO JARDIM BRILHAMTISMO

19 ANDAR D, MACAU

(individually or collectively referred to herein as the “BORROWER”)

The following paragraph numbers correspond to paragraph numbers contained in the Agreement.

2. LOAN; LOAN ADVANCES.

Advance Formula: Advances of the Loan may be measured against a percentage of Eligible Accounts.

The Loan Amount may not exceed an amount which is the lesser of:

(a)        (i) Five Million and 00/100 Dollars ($5,000,000.00) for the period from August 2^nd through February 14^th of each year; and (ii) Five Hundred Thousand and 00/100 Dollars ($500,000.00) for the period from February 15^th through August 1^st of each year (as applicable, the “Maximum Amount”); or

(b)        up to seventy percent (70%) of Eligible Accounts (the “Advance Formula”).

Crestmark may, among other reserves, include a “Dilution Reserve” which is the Dilution Percentage less the Base Dilution. “Dilution Percentage” means: (i) all sales which have not been collected and have been removed from Borrower’s accounts receivable aging plus all sales that may not be collectable but not yet removed from the accounts receivable aging (as determined by Crestmark in its sole discretion) divided by (ii) total sales and (iii) stated as a percentage, as determined by Crestmark. “Base Dilution” means: fifteen percent (15%). Crestmark shall reserve against the advance rate for Eligible Accounts by one percent (1.00%) for each percentage point or portion thereof that the Dilution Percentage exceeds Base Dilution.

Eligible Accounts means and includes those Accounts, unless otherwise approved by Crestmark which:

(i) have been validly assigned to Crestmark;

(ii) strictly comply with all of Borrower's promises, warranties and representations to Crestmark;

(iii) contain payment terms of not greater than sixty (60) days from the date of invoice except for Toys R Us which may contain payment terms of not greater than seventy-five (75) days from the date of invoice

(iv) contain payment terms of not greater than thirty (30) days from the date of invoice for Accounts for which Advances are requested during the period from December 1 through December 15 of each year;

(v) are not older than ninety (90) days from date of invoice. (“Past Due Days”); and

(vi) are invoiced no later than ten (10) days from the last date of service or sale.

Eligible Accounts shall not include the following:

(a) Accounts with respect to which the Account Debtor is an officer, employee or agent of Borrower;

(b) Accounts with respect to which services or goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional;

(c) Accounts with respect to which the Account Debtor is not a resident of the United States;

(d) Accounts with respect to which the Account Debtor is the United States or any department, agency or instrumentality of the United States; provided, however, that an Account shall not be deemed ineligible by reason of this clause (d) if the aggregate amount of such Accounts does not exceed five percent (5%) of the total of Borrower’s Accounts outstanding, or in the event the aggregate amount of such Accounts does exceed five percent (5%) of the total of Borrower’s Accounts outstanding, and that Borrower has completed all of the steps necessary, in the sole opinion of Crestmark, to comply with the Federal Assignment of Claims Act of 1940 (31 U.S.C. Section 3727) with respect to such Account;

(e) Accounts with respect to which the Account Debtor is any state of the United States or any city, town, municipality, county or division thereof, provided, however, that an Account shall not be deemed ineligible by reason of this clause (e) if the aggregate amount of such Accounts does not exceed five percent (5%) of the total of Borrower’s Accounts outstanding;

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SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA 2 v6

(f) Accounts with respect to which the Account Debtor is a subsidiary of, related to, affiliated with, or has common shareholders, officers or directors with Borrower;

(g) Accounts with respect to which Borrower is or becomes liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower;

(h) those Accounts where Crestmark has notified Borrower that, in Crestmark’s sole discretion, the Account or Account Debtor is not acceptable to Crestmark;

(i) all of the Accounts owed by an Account Debtor who is the subject of a bankruptcy, receivership or similar proceeding;

(j) all of the Accounts owed by an Account Debtor where twenty percent (20%) or more of all of the Accounts owed by that Account Debtor are greater than the Past Due Days;

(k) Accounts for which the services have not yet been rendered to the Account Debtor or the goods sold have not yet been delivered to the Account Debtor (commonly referred to as "pre-billed accounts");

(l) Accounts not previously approved by Crestmark where the expected dollar value for such Account Debtors is greater than ten percent (10%) of Borrower's existing Accounts;

(m) COD and cash sales;

(n) Accounts are disputed; and

(o) Accounts owing from Walgreen Co. and its affiliates (“Walgreens”), Toys“R”Us,Inc., in connection with its Direct Import Accounts (those Accounts which have terms of 45 days) (“TRU DIA”), Sam’s Club, in connection with its Direct Import Account (which have terms of L/C sight) (“SC DIA”), Amazon.com, in connection with it Direct Import Accounts (which have terms of 1% 30, net 45)(“Amazon DIA”),

Walmart.com, ToysRUs.com and BJ’s.com, all on drop shipments. Crestmark will determine in its sole discretion whether any Collateral is eligible for an Advance, but no Collateral will be considered eligible unless the requirements set forth above are met. Regardless of whether any Collateral is eligible, it is still part of the Collateral securing the Obligations.

Prior to any request for an Advance, Borrower must furnish to Crestmark invoices, credit memos, purchase orders, evidence of delivery, proof of shipment, timesheets or any other documents Crestmark requests, in its sole discretion, with respect to the Accounts that Borrower is tendering to Crestmark to support the Advance (“Account Documents”). Crestmark will endeavor to provide the requested Advance by the end of the next business day following the date it receives the request as long as the complete package of information for the request has been received by Crestmark by 10:30 a.m. Eastern Time on the date of the request for the Advance. All requests for funding will be subject to Crestmark’s then standard fees for electronic funds transfer, wire transfers and check services.

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SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA 3 v6

Each time an Advance is made, the amount of the Obligations will be increased by the amount of the Advance. On the later of three (3) business days (“Clearance Days”) after checks, ACH or wire transfers or other credit instruments are applied to a specific invoice, Crestmark will credit the Loan Account with the net amount actually received. On the date a collection is applied to a specific invoice, Borrower will receive immediate credit on such funds in determining availability for Advances. Upon the receipt of a payment from an Account Debtor, including, without limitation, Walgreens, Crestmark will use such payment to reduce the Obligations, and no portion of such payments shall be released to the Borrower until the Obligations are reduced to $0.00. Notwithstanding the foregoing, Crestmark may release to Borrower payments received on those Accounts listed in Section Eligible Accounts(o) except for Walgreens in Crestmark’s commercially reasonable discretion.

When Crestmark receives a payment from an Account Debtor, it will attempt to apply it against the appropriate Account Debtor and invoice according to the Account Debtor’s remittance advice. If it is not clear which Account Debtor or invoice the payment is to be applied against, Crestmark may contact Borrower or the payor for assistance. Unless there is clear error, the application of payments by Crestmark is final.

4. FEES AND EXPENSES. The following fees will be paid by Borrower:

Loan Fee: Waived.

Late Reporting Fee: Borrower will pay Crestmark a Late Reporting Fee in an amount equal to One Hundred Fifty and 00/100 Dollars ($150.00) per document per business day for any day in which any report, financial statement or schedule required by the Agreement is delivered late.

Lockbox Fee: Each month Borrower will pay all costs in connection with the Lockbox and the Lockbox Account, as determined by Crestmark from time to time.

Documentation Fee: In consideration of the extension of the Loan and the execution of this Agreement, Borrower will pay Crestmark a documentation fee of Seven Hundred Fifty and 00/100 Dollars ($750.00), which fee is fully earned as of the date hereof and is non-refundable.

Overformula Fee: In the event of the occurrence of an Overformula, Borrower will pay to Crestmark an Overformula Fee of the greater of (i) 0.04937% per day on the amount of such Overformula, or (ii) Two Hundred Fifty and 00/100 Dollars ($250.00) per day.

Misdirection Fee: In the event that the Borrower fails to immediately deposit funds in the Lockbox Account or the Lockbox in the form received as provided above, in addition to all other remedies of Crestmark hereunder, Borrower shall pay a Misdirection Fee. The Misdirection Fee is equal to five percent (5.00%) of the amount of the funds which Borrower deposits in any bank account other than the Lockbox Account or the Lockbox, or are otherwise not remitted to Crestmark as required in the Agreement. Nothing provided herein shall in any manner authorize the Borrower to misdirect funds as prohibited by the Agreement. Crestmark is the owner of all deposits in the Lockbox and the Lockbox Account, and has no duty as to collection or protection of funds as long as it is not grossly negligent or commits actual fraud.

Missing Notation Fee: Borrower will pay to Crestmark a Missing Notation Fee of five percent (5.00%) of the face amount of each invoice on any invoice that is sent by Borrower to an Account Debtor that does not contain the notice as required by Section 5 of the Loan and Security Agreement hereof.

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SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA 4 v6

Maintenance Fee: On each Account, Borrower will pay Crestmark a Maintenance Fee equal to one percent (1.00%) of the face amount of the invoice for each ninety (90) days, or part thereof, that the Account is outstanding (the “Initial Maintenance Fee”); provided, however, if the Account has not been paid in full in ninety (90) days and Crestmark does not recourse the Account back to Borrower, Borrower will pay Crestmark an Incremental Maintenance Fee equal to one and one quarter of one percent (1.25%) of the face amount of the invoice for each ten (10) days the Account is outstanding for over 90 days. The first ninety (90) day Maintenance Fee will be due upon furnishing the invoice to Crestmark, and each Maintenance Fee thereafter will be due when Crestmark collects the Account, or if Crestmark is not able to collect the Account, the Maintenance Fee will be paid by Borrower on demand by Crestmark and calculated based on when Crestmark is paid.

Term: This Agreement shall continue in full force and effect, but if not sooner demanded, for two (2) years from the date hereof (“Term”), and for additional two (2) year terms unless terminated by Borrower sixty (60) days prior to the end of the initial Term or any renewal Term. In the event of termination by Borrower of this Agreement or repayment in full of the Obligations prior to the expiration of the Term or any renewal Term, Borrower shall pay to Crestmark, as an early termination fee (the “Exit Fee”), an amount equal to Seventy Thousand and 00/100 Dollars ($70,000.00) per year, less actual Initial Maintenance Fees earned for such year, or part thereof, remaining in Agreement plus any unpaid fees. In the event that payment of the Obligations shall be accelerated for any reason whatsoever by Crestmark, the Exit Fee in effect as of the date of such acceleration shall be paid and such Exit Fee shall also be added to the outstanding balance of the Obligations in determining the debt for the purposes of any judgment of foreclosure of any loan documents given to secure the Obligations.

5. LOCKBOX.

The Lockbox Account means:

Drawer 1764

PO Box 5935

Troy, MI 48007-5935

(or) if by wire transfer or ACH transfer, according to the following instructions:

Crestmark Bank

Troy, MI

ABA: 072413764

For Account of: Singing Machine Company, Inc. or-

SMC (Comercial Offshore de Macau) Limitada

Account Number: 9545961000

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SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA 5 v6

10. REPRESENTATIONS.

(A)         The Singing Machine Company, Inc.’s state of organization is Delaware and its state organizational identification number is 2376345. SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA’s country of organization is Macau and its registration no. is 21300 SO.

(F)          List Security Interests in the Collateral held by creditors other than Crestmark as Permitted Encumbrances:

NONE

(J)          List Borrower’s Tradenames:

NONE

11. BORROWER’S PROMISES:

C.           BORROWER CLAIMS THRESHOLD: Two Thousand Five Hundred Dollars ($2,500.00).

E.           FINANCIAL COVENANTS: Borrower will maintain the following Financial Covenants:

Except as otherwise permitted under this Agreement, at no time shall Borrower make any loans, advances, intercompany transfers or cash flow between Borrower and any subsidiary, related entity or affiliate of Borrower or with any company that has common shareholders, officers or directors with Borrower. Notwithstanding the foregoing, Borrower may do business with Starlight Marketing Development Limited and Ram Light Management Limited (collectively the “Related Parties”) in the ordinary course of business and on the same terms as would be applicable for non-related third parties, so long as the Related Parties enter into subordination agreements with Crestmark in form and content satisfactory to Crestmark. Notwithstanding the foregoing, Borrower may do business with Starlight Marketing Limited, Starlight R&D Ltd., Hyundai Household Improvement Ltd., Starlight Consumer Electronics, USA, Inc., Starlight Consumer Electronics, Ltd., Starlight Electronics USA, Inc., Starfair Electronics Co., Ltd., Cosmo HK, Cosmo Communications Canada, Inc., Cosmo Communications USA Corp. and Star Light Electronics, Ltd. (collectively the “Other Related Parties”) in the ordinary course of business and on the same terms as would be applicable for non-related third parties.

All of the financial covenants in this Agreement shall be determined in accordance with GAAP, unless otherwise provided.

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"GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination and applied on a consistent basis.

F. REQUIRED INSURANCE

Without limiting Crestmark’s requirements for insurance coverage, which may change from time to time, the following is/are the minimum insurance requirement(s):

PROPERTY DAMAGE- Crestmark named Lender Loss Payee.

GENERAL AND PROFESSIONAL LIABILITY-Crestmark named as additional insured for an amount not less than the smallest amount required under any contract with any Account Debtor.

All insurance required in any contract, purchase order or any other agreement with Account Debtors.

12. NEGATIVE COVENANTS.

C.          BORROWER OBLIGATION THRESHOLD: Twenty Five Thousand Dollars ($25,000).

G.          CLAIMS THRESHOLD: Two Thousand Five Hundred Dollars ($2,500.00).

13. FINANCIAL REPORTS.

Management Prepared Financial Statements: Borrower will deliver to Crestmark management prepared financial statements, balance sheets, and profit and loss statements for quarter then ended, certified to by the president or chief financial officer of Borrower. Such reports will set forth the financial affairs and true condition of Borrower for such time period and will be delivered to Crestmark no later than forty-five (45) days after the end of each quarter.

Annual Financial Statements: Each year Borrower will deliver to Crestmark annual audited financial statements, cash flow statements, balance sheets, and profit and loss statements prepared by a certified public accountant acceptable to Crestmark, all without exceptions. Such reports will set forth in detail Borrower's true condition as of the end of Borrower's fiscal year. Borrower shall deliver annual financial statements no later than one hundred twenty (120) days after the end of Borrower's fiscal years.

All financial statements are and will be prepared in accordance with GAAP on an accrual basis applied on a consistent basis.

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Accounts Receivable Aging and Accounts Payable Aging Reports: Borrower will furnish to Crestmark the following certified to by the president or chief financial officer of Borrower within the time periods set forth:

(a) Accounts Receivable Reports: Upon request by Crestmark; and

(b) Accounts Payable Reports: Upon request by Crestmark.

Field Examinations: Borrower will reimburse Crestmark for the costs to perform field examinations of Borrower's books and records, assets and liabilities, to be performed by Crestmark's inspector, whether a Crestmark officer or an independent party, with all expenses (whether for a Crestmark employee or otherwise, at the rate of the greater of $850.00 or current market rate, per examiner, per day, for each day of the field examination including preparation of the field examination report, together with all out of pocket expenses including, but not limited to, transportation, hotel, parking, and meals) paid by Borrower. Field examinations are performed for Crestmark’s internal use and Crestmark has no obligation to provide Borrower or Guarantor with the results of the examination or copies of any reports or work papers in whole or in part.

Tax Deposit Evidence: Submit payroll summaries and evidence of tax payments together with copies of bank statements from which the funds are impounded, as well as, Federal Forms 940 and 941 to Crestmark upon Crestmark’s request.

Customer Lists: Upon Crestmark’s request, Borrower will deliver to Crestmark detailed customer lists showing the customer's name, address, phone number and any other information Crestmark reasonably requests.

Projections: Borrower shall deliver to Crestmark, within sixty (60) days prior to each year-end, an annual financial projection including balance sheet, income statements, and statement of cash flows together with assumptions for the following year, broken down monthly.

Other Information: Borrower and Guarantor will also deliver to Crestmark such other financial statements, financial reports, projections, documentation, tax returns and other information as Crestmark requests from time to time.

(Signatures on Next Page)

THE SINGING MACHNE COMPANY, INC.
SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA 8 v6

18. NOTICES. Addresses for Notices are as set forth at the beginning of this Schedule.

BORROWER:
THE SINGING MACHINE COMPANY, INC.
a Delaware corporation
By:	Gary Atkinson
Its:	CEO
SMC (COMERCIAL OFFSHORE DE MACAU)
LIMITADA
a Macau corporation
By:	Carol Chu Lan Lau
Its:	Director
CRESTMARK:
CRESTMARK BANK
a Michigan banking corporation
By:
Its:

THE SINGING MACHNE COMPANY, INC.
SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA 9 v6

EX-99.3

PROMISSORY NOTE

Principal Amount $5,000,000 Troy, Michigan 

Dated: _______________, 2012

This Promissory Note (“Note”) is made by the Borrower who has signed this Note. The Borrower promises to pay to the order of CRESTMARK BANK, a Michigan banking corporation (“Crestmark"), ON DEMAND, at its offices located at 5480 Corporate Drive, Suite 350, Troy, Michigan 48098 or at such other place as Crestmark or the person that then holds this Note designates in writing, the principal amount set forth above or such lesser or greater amount as may then be due under the Agreement (as defined below), plus interest, fees and expenses as hereinafter provided. All payments that are made must be made in lawful money of the United States of America in immediately available funds. Borrower does not have any right to offset, deduction, or counterclaim from the amount due.

This Note is referred to in and was delivered pursuant to the Loan and Security Agreement (“Agreement”) of even date between Borrower and Crestmark under which Advances, repayment and further Advances may be made from time to time, pursuant to the provisions of the Agreement. Reference is made to the Agreement for additional terms relating to this Note and the security given for this Note. Any capitalized terms used in this Note, if not defined in this Note, will have the meanings assigned to such terms in the Agreement.

The outstanding principal balance of this Note will bear interest based upon a year of 360 days with interest being charged for each day the principal amount is outstanding including the date of actual payment. The interest rate will be a rate which is equal to two (2.00%) percentage points in excess of that rate shown in the Wall Street Journal as the prime rate (the “Effective Rate”). Interest on this Note will change with each change in the prime rate so published. If at any time Crestmark either abandons the use of the Wall Street Journal prime rate or the Wall Street Journal prime rate is no longer published, then Crestmark will establish a similar replacement rate in its sole discretion. Notwithstanding the foregoing, at no time will the Effective Rate be less than five and one-quarter percent (5.25%) per annum.

Borrower must pay interest on the principal amount which is outstanding each month in arrears commencing on the first day of the month following the funding of the transaction, and continuing on the first day of each month thereafter until the Obligations are fully paid. If the Agreement so provides, interest will also be payable at the same rate on all other sums constituting Obligations. If any payment is due on a day which Crestmark is not open for business, then payments will be made on the next business day. Payments will be applied in the manner provided in the Agreement. If Borrower at any time pays less than the amount then due, Crestmark may accept such payment, but the failure to pay the entire amount due is a Default. The (i) failure of Borrower to comply with the provisions of the Agreement or (ii) failure to pay the Obligations following demand will permit Crestmark to charge the Extra Rate. The “Extra Rate” shall mean the Effective Rate plus twelve and three-quarters percent (12.75%) per annum.

v1

Should Borrower make any payment by mail, the payment must be actually received by Crestmark before the payment is credited but payment is still subject to the Clearance Days as defined in the Schedule to the Agreement. Borrower assumes all risk resulting from non-delivery or delay, in delivery of any payment no matter how the payment is delivered.

If Borrower elects to prepay this Note and/or terminate the Agreement, Borrower may do so, but only upon payment of all the Obligations, including the Exit Fee set forth in the Schedule.

It is the intent of the parties that the rate of interest and other charges to Borrower under this Note shall be lawful; therefore, if for any reason the interest or other charges payable hereunder are found by a court of competent jurisdiction, in a final determination, to exceed the limit Crestmark may lawfully charge Borrower, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amount in excess of such limit shall have been paid, then such amount shall be credited to the outstanding principal balance of this Note, or if no such amount is outstanding, refunded to Borrower.

Borrower waives any obligation of Crestmark to present this Note for payment or to give any notice of nonpayment or notice of protest and any other notices of any kind. The liability of the Borrower is absolute and unconditional, without regard to the liability of any other party.

If this Note is signed by two or more parties, the obligations and undertakings under this Note shall be that of all and any two or more jointly and also each severally.

THE SINGING MACHINE COMPANY, INC.

a Delaware corporation

By: Gary Atkinson

Its: CEO

SMC (COMERCIAL OFFSHORE DE MACAU)

LIMITADA

a Macau corporation

By: Carol Chu Lan Lau

Its: Director

v1

EX-99.4

SUBORDINATION AGREEMENT

THIS AGREEMENT is made this ________ day of________________, 2 012, by and between Crestmark Bank, a Michigan banking corporation, having offices at 5480 Corporate Drive, Suite 350, Troy, Michigan 48098(the "Bank"), The Singing Machine Company, Inc., a Delaware corporation whose address is 6301 N.W. 5^th Way, Suite 2900, Ft. Lauderdale, FL 33309 and SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA, a Macau corporation whose address is Alameda Dr. Carlos D'Assumpacao, 181-187 Edificiio Jardim Brilhamtismo, 19 andar D, Macau (individually or collectively referred to herein as the "Borrower"), and Ram Light Management Limited, whose address is 232 Aberdeen Main Road, Shing Dao Industrial Building, 5^th Floor, Hong Kong (the "Subordinating Creditor").

BACKGROUND:

As of the date hereof, Borrower is now indebted to Subordinating Creditor in the approximate aggregate amount of One Million Six Hundred Eighty Three Thousand Two Hundred Forty Seven and 32/100 Dollars ($1,683,247.32)and may in the future be owed additional sums (collectively, the "Junior Indebtedness");

Borrower is now, or will be, indebted to Bank on the date hereof in an aggregate principal amount of up to Five Million Dollars ($5,000,000), and for the Indebtedness (which may exceed the amount herein set forth) as defined in a Loan and Security Agreement executed between Bank and Borrower, as amended from time to time (collectively, the "Senior Indebtedness"); and

Subordinating Creditor is financially interested in Borrower and desires to aid Borrower in obtaining financing; and

Bank is willing to lend sums to Borrower provided Borrower and Subordinating Creditor comply with all of the terms and conditions of this Agreement.

In consideration of the mutual promises and covenants hereinafter contained, and as an inducement to Bank to advance credit and lend money to Borrower, it is jointly and severally agreed by the parties hereto as follows:

1.    Subordination of the Junior Indebtedness: Except as permitted and as conditioned in Paragraph 23, the Senior Indebtedness, and all liability of Borrower to Bank now existing or hereafter created shall be indefeasibly paid in full in cash and discharged, together with all interest, collection expenses, and reasonable attorneys' fees, and Subordinating Creditor shall receive written notice thereof from Bank, before any payment shall be accepted from or required of Borrower as to any of the Junior Indebtedness.

2.    Subordination of Lien: Subordinating Creditor, notwithstanding the order of attachment or perfection of its security interests, in the assets of the Borrower, subordinates to the Bank any and all security interests which Subordinating Creditor now has or in the future may have in the Collateral (as defined in the Loan and Security Agreement) of the Borrower together with all products and proceeds thereof. Subordinating Creditor further agrees that it will not enforce or assert any of its rights or security interests in or in any other manner interfere with Bank's security interests in the Collateral, unless and until Bank has advised Subordinating Creditor, in writing, that Borrower has indefeasibly paid in full and in cash, the Senior Indebtedness owing to Bank. By means of illustration, not limitation, Subordinating Creditor agrees that it will not seek to foreclose on any Collateral, demand or accelerate any indebtedness owing to Subordinating Creditor, assert any set-off or counterclaim, or notify account debtors of Subordinating Creditor's security interest in the proceeds of the Collateral, if any, unless and until Bank has advised Subordinating Creditor, in writing, that Borrower has satisfied, in full, the Senior Indebtedness. Furthermore, until receipt of such notice, Subordinating Creditor (i) will not assert any claim for marshalling of Borrower's assets, (ii) consents to the collection or sale of the Collateral by Bank free and clear of Subordinating Creditor's security interest, and (iii) without the necessity of demand or request by Bank, Subordinating Creditor will turn or pay over to Bank any money or the proceeds of any Collateral coming into Subordinating Creditor's possession, custody or control. In furtherance of the foregoing, at the request of Bank, Subordinating Creditor agrees that it will take any and all such action as Bank may request to facilitate the collection or sale of any Collateral by Bank or Borrower, including without limitation, the termination of Subordinating Creditor's security interest in any such Collateral. Furthermore, Subordinating Creditor consents to any and all dispositions of the Collateral now or hereafter made by Bank and waives any claims contesting the commercial reasonableness of any sales. Subordinating Creditor acknowledges that the intent of this paragraph is to place Bank in the same position as if the Collateral was not subject to Subordinating Creditor's security interest, and agrees that it will assert no claims against Bank with respect to the Collateral.

3.     Receipt of Payments: In the event Subordinating Creditor shall receive payment from Borrower in violation of the law or this Agreement, whether such payment be in cash or otherwise, Subordinating Creditor shall be liable and accountable to Bank therefore, shall be deemed to have received such payment in trust for the use and benefit of Bank, shall not commingle the same with any other funds and shall pay over and deliver such payment to Bank immediately, to be applied upon the Senior Indebtedness of Borrower to Bank if in cash, and if in form other than cash, then as the same is converted into cash. In the event of the failure of Subordinating Creditor to endorse any instrument received by Subordinating Creditor and made payable to Subordinating Creditor's order, Bank or any officer or employee is hereby irrevocably constituted and appointed attorney in fact for Subordinating Creditor, such appointment being deemed coupled with an interest, with full power to make any such endorsement, and with full power of substitution.

4.    Survival: This Agreement shall survive and remain in full force and effect in the event of any administration of the property and/or affairs of Borrower arising from any assignment for the benefit of creditors, bankruptcy, receivership, liquidation or other like proceedings; and no delay, forbearance, or omission by Bank in the exercise of any right or power accruing to it upon any default in the performance hereof by the other parties hereto, shall impair any such right or power of Bank or shall be construed to be a waiver of any such default or acquiescence therein. Possession by Bank of any note or other evidence of indebtedness made, endorsed or guaranteed by Borrower shall be conclusive evidence (but not the only means of establishing) that Borrower is indebted to Bank and that the indebtedness is covered by this Agreement. Furthermore, this Agreement shall continue in full force and effect and Bank may make advancements of credit to Borrower in reliance upon this Agreement, until terminated as otherwise provided herein. Thereafter, this Agreement shall nevertheless remain in full force and effect with respect to the Senior Indebtedness and the Junior Indebtedness, and Bank may continue to grant to Borrower renewals and/or extensions of time, and may otherwise proceed in its sole discretion in the enforcement of the Senior Indebtedness.

5.    Default: It shall be a Default under the Loan and Security Agreement if Borrower, in violation of this Agreement, shall make payment to Subordinating Creditor, whether such payment be in cash or otherwise.

6.    Amount of Debt: The amounts set opposite the signature of Subordinating Creditor below represent all of the amounts currently owing by Borrower to said Subordinating Creditor. Subordinating Creditor is the sole owner of the Junior Indebtedness.

7.    Subrogation: Until the Senior Indebtedness is indefeasibly paid in full in cash, Subordinating Creditor shall not exercise any rights of subrogation. Until the Senior Indebtedness has been indefeasibly paid in full in cash, Subordinating Creditor also transfers and assigns to Bank, as collateral security for any and all obligations of Borrower to Bank, the right to enforce the Junior Indebtedness and all of the claims or demands of Subordinating Creditor against Borrower, with full right on the part of Bank, in its own name or in the name of Subordinating Creditor, to collect and enforce said claims, by suit, proof of debt in bankruptcy, or other liquidation proceedings, or otherwise. Any proceedings shall be at the sole discretion of Bank, and Bank has no obligation to Subordinating Creditor to take any steps with regard to these claims or demands, or the Junior Indebtedness, or any collateral or other security for the Junior Indebtedness.

8.    Cumulative Rights: Upon any default or breach of this Agreement by Subordinating Creditor or Borrower, Bank shall have all of the rights and remedies available at law or equity, including those of a secured creditor under the Michigan Uniform Commercial Code, as amended from time to time. This Agreement, and the rights of the parties hereto, are in addition to, and not in lieu of, any other rights or remedies available to the parties.

9.     Consents: This Agreement and its terms shall in no way be affected or impaired by, and Subordinating Creditor hereby irrevocably consents to, without notice: (a) any increase in the Senior Indebtedness; (b) any amendment, alteration, extension, renewal, waiver, indulgence or other modification of the Loan and Security Agreement or Collateral Documents; (c) any settlement or compromise in connection with the Loan and Security Agreement, Collateral Documents or Senior Indebtedness; (d) any substitution, exchange, release or other disposition of all or any part of the Loan and Security Agreement, Collateral Documents or the Senior Indebtedness; (e) any failure, delay, neglect, act or omission by Bank to act in connection with the Loan and Security Agreement, Collateral Documents or Senior Indebtedness; (f) any advances for the purpose of performing or curing any term or covenant contained in the Loan and Security Agreement, Collateral Documents or with respect to the Senior Indebtedness to which Borrower shall be or would otherwise be in default; and (g) any other matter whether similar or dissimilar to the foregoing. The obligations and agreements of Subordinating Creditor shall be unconditional, notwithstanding any defect in the genuineness, validity, regularity or enforceability of the Senior Indebtedness or the Loan and Security Agreement, Collateral Documents or any other circumstances whether or not referred to herein, which might otherwise constitute a legal or equitable discharge or a defense to Subordinating Creditor.

10.    Insurance Proceeds: Proceeds of the Collateral include insurance proceeds, and therefore, notwithstanding anything contained in any other agreements, the priorities set forth herein shall govern the ultimate disposition of casualty insurance proceeds. Bank, as the holder of a senior security interest on the Collateral shall have the sole and exclusive right to adjust settlement of insurance claims in the event of any covered loss, theft or destruction of the Collateral. All proceeds of insurance shall inure to Bank to the extent of the Senior Indebtedness, and Subordinating Creditor shall fully cooperate in effecting the payment of insurance proceeds to Bank. In the event Bank, in its sole discretion or pursuant to an agreement with Borrower, permits the Borrower to utilize the proceeds of insurance to replace the Collateral, the consent of Bank thereto shall be deemed to include the consent of Subordinating Creditor.

11.  Waivers: Subordinating Creditor hereby waives: (a) notice of any of the events set forth in Paragraph 9; (b) notice of the creation of all or any portion of the Senior Indebtedness or an increase in the Senior Indebtedness; (c) presentment and demand for payment of any Senior Indebtedness of Borrower, notice of nonperformance, protest, notice of protest, and notice of dishonor or default in connection with any Senior Indebtedness; (d) all other notices to which Subordinating Creditor might otherwise be entitled; (e) any defense arising by reason of any disability or other defense of Borrower; (f) any right to cause a marshalling of Borrower's assets; (g) any right to require Bank to proceed against any person, including without limit Borrower or guarantor; (h) any right to require Bank to proceed against or exhaust any of Borrower's, guarantor's or any other person's security; and (i) any right to require Bank to pursue any other remedy in Bank's power. Subordinating Creditor acknowledges and agrees that Bank's rights under this Agreement are not conditioned upon pursuit by Bank of any remedy Bank may have against Borrower or guarantor or any other Person or any other security. No waiver or modification of any of Bank's rights under this Agreement shall be effective unless the waiver or modification shall be in writing and signed by an authorized officer on behalf of Bank, and each waiver or modification shall be a waiver or modification only with respect to the specific matter to which the waiver or modification relates and shall in no way impair the rights of Bank or the obligations of Subordinating Creditor to Bank in any other respect.

12.  Non-Reliance: Subordinating Creditor delivers this Agreement based solely on Subordinating Creditor's independent investigation of (or decision not to investigate) the financial condition of Borrower and is not relying on any information furnished by Bank. Subordinating Creditor assumes full responsibility for obtaining any further information concerning Borrower's financial condition, the status of the Senior Indebtedness or any other matter which Subordinating Creditor may deem necessary or appropriate now or later. Subordinating Creditor waives any duty on the part of Bank, and agrees that Subordinating Creditor is not relying upon nor expecting Bank to disclose to Subordinating Creditor any fact now or later known by Bank, whether relating to the operations or condition of Borrower, the existence, liabilities or financial condition of any guarantor of the Senior Indebtedness, the occurrence of any default with respect to the Senior Indebtedness, or otherwise, notwithstanding any effect such fact may have upon Subordinating Creditor's risk or Subordinating Creditor's rights against Borrower. Subordinating Creditor knowingly accepts the full range of risk encompassed in this Agreement, which risk includes, without limit, the possibility that Bank may demand repayment of the Senior Indebtedness at any time and that Borrower may incur Senior Indebtedness to Bank after the financial condition of Borrower, or its ability to pay Borrower's debts as they mature, has deteriorated.

13.   Joint and Several: The term "Subordinating Creditor" or "Borrower" as used in this Agreement shall, if this instrument is signed by more than one party as a Subordinating Creditor or Borrower, mean respectively Subordinating Creditor and Borrower and each of them, jointly and severally.

14.   Agreement/Choice of Laws: All parties hereto have the authority to enter into this Agreement and the execution of this Agreement has been duly authorized. This Agreement shall be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. This Agreement shall be construed according to the laws of the State of Michigan (irrespective of the state's choice of law rules).

15.   Notice: Subordinating Creditor agrees, covenants and acknowledges that in the event of any default of Borrower to Subordinating Creditor on the Junior Indebtedness to give prompt written notice thereof to Bank at the address provided herein.

16.  Survival: If after receipt of any payment of all or any part of the Senior Indebtedness, Bank is for any reason compelled to surrender the payment to any person or entity, because the payment is determined to be void or voidable as a preference, impermissible setoff, diversion of trust funds or for any other reason, then to the extent of that payment, the Senior Indebtedness shall be automatically revived and Bank's rights under this Agreement shall be automatically continued in effect without reduction or discharge for that payment, and this Agreement shall automatically continue in full force notwithstanding any contrary action which may have been taken by Bank in reliance upon that payment (including, without limit, surrender or termination of this Agreement) and any contrary action so taken shall be without prejudice to Bank's rights under this Agreement and shall be deemed to have been conditioned upon that payment having become final and irrevocable.

17.   Indemnification:Subordinating Creditor hereby assumes responsibility and liability for, and hereby holds harmless and indemnifies Bank from and against, any and all losses, damages, costs and expenses, including reasonable attorney fees, incurred or suffered, directly or indirectly, by Bank which arise in whole or in part from any breach of this Agreement by Subordinating Creditor.

18.   Severability: If any provision of this Agreement is in conflict with any statute or rule of law or is otherwise unenforceable for any reason, then that provision shall be deemed null and void to the extent of the conflict or unenforceability and shall be deemed severable, but shall not invalidate any other provision of this Agreement.

19.   Counterparts.This Agreement may be executed in several counterparts, and each executed counterpart shall constitute an original instrument, but such counterparts shall together constitute but one and the same instrument.

20.   Binding Effect: Subordinating Creditor waives notice of acceptance by Bank of this Agreement and this Agreement is immediately binding upon Subordinating Creditor. This Agreement constitutes a continuing agreement of subordination even though at times Borrower may not be indebted to Bank. Subordinating Creditor acknowledges that the aforesaid Loan and Security Agreement contemplates Money Advances and other sums being advanced, from time to time thereunder, which may be mandatory or discretionary, and that the first, valid and prior interest of Bank herein granted, subordinated to and hereinafter warranted shall remain notwithstanding the repayment, in whole or in part, of the Senior Indebtedness outstanding from time to time, until termination of the entire relationship between Borrower and Bank, and receipt of notice by Subordinating Creditor as hereinabove contemplated.

21. Waiver of Jury Trial: BORROWER AND SUBORDINATING CREDITOR DO EACH KNOWINGLY AND VOLUNTARILY AND INTELLIGENTLY WAIVE THEIR CONSTITUTIONAL RIGHT TO A TRIAL BY JURY WITH RESPECT TO ANY CLAIM, DISPUTE, CONFLICT OR CONTENTION, IF ANY, AS MAY ARISE UNDER THIS AGREEMENT, AND AGREE THAT ANY LITIGATION BETWEEN THE PARTIES CONCERNING THIS AGREEMENT SHALL BE HEARD BY A COURT OF COMPETENT JURISDICTION SITTING WITHOUT A JURY. BORROWER AND SUBORDINATING CREDITOR HEREBY CONFIRM TO BANK THAT THEY HAVE REVIEWED THE EFFECT OF THIS WAIVER OF JURY TRIAL WITH COMPETENT LEGAL COUNSEL OF THEIR CHOICE, OR HAVE BEEN AFFORDED THE OPPORTUNITY TO DO SO, PRIOR TO SIGNING THIS AGREEMENT AND EACH ACKNOWLEDGE AND AGREE THAT BANK IS RELYING UPON THIS WAIVER IN EXTENDING THE LOAN TO BORROWER.

22.   Consent to Jurisdiction: BORROWER AND SUBORDINATING CREDITOR HEREBY WAIVE ANY PLEA OF JURISDICTION OR VENUE ON THE GROUND THAT SUCH BORROWER OR SUBORDINATING CREDITOR IS NOT A RESIDENT OF OAKLAND COUNTY, MICHIGAN, AND HEREBY SPECIFICALLY AUTHORIZE ANY ACTION BROUGHT TO ENFORCE BORROWER'S OR SUBORDINATING CREDITOR'S OBLIGATIONS TO THE BANK TO BE INSTITUTED AND PROSECUTED IN EITHER THE CIRCUIT COURT OF OAKLAND COUNTY OR A DISTRICT COURT WITHIN THE BOUNDARIES OF OAKLAND COUNTY, AS APPROPRIATE, OR IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN AT THE ELECTION OF THE BANK, AND BORROWER AND SUBORDINATING CREDITOR HEREBY SUBMIT TO THE JURISDICTION OF SUCH COURT.

23.   Permitted Payments: Notwithstanding anything contained herein to the contrary, Subordinating Creditor may receive from Borrower payments of invoices outstanding in the ordinary course and when due according to their terms, but without acceleration or prepayment thereof for any reason, limited to the lesser of the amount then currently due under the invoices or fifty (50%) percent of Free Cash Flow measured monthly (defined as net income plus depreciation and amortization less debt service, capital expenditures, distributions, dividends, or loans to employees, shareholders or officers and affiliates) as and when due, provided (i) a Default (which has not been cured if a cure is permitted under the terms of the Loan and Security Agreement) has not occurred under the Loan and Security Agreement, and/or the permitted payment will not cause a Default under the Loan Agreement, (ii) Subordinating Creditor has not received notice of the occurrence of the Default, at which time upon receipt of such notice, Subordinating Credit may no longer receive payments from Borrower, and (iii) Borrower has sufficient excess availability to make repayment. In no event, however, shall Subordinating Creditor make any demand or claim against Borrower for any sums due in excess of the above monthly amount until all Senior Indebtedness now existing or hereafter created is indefeasibly paid in full in cash.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above.

"BANK"	"BORROWER"
Crestmark Bank, a Michigan bank	The Singing Machine Company, Inc., a Delaware corporation
By:	By:
		Gary Atkinson
Its: Vice President	Its:	CEO
	SMC (COMERCIAL OFFSHORE DE MACAU)
	LIMITADA
	a Macau corporation
	By:	/s/ Carol Chu Lan Lau
		Carol Chu Lan Lau
	Its:	Director

"SUBORDINATING CREDITOR"	"AMOUNT"
Ram Light Management Limited	$1,683,247.32
/s/ Lau Sak Hong
By:        Lau Sak Hong
Its:	On October 17, 2012, I Lau sak Hong, have signed a subordination agreement for Ram Light Management Limited in favor of Crestmark Bank in my capacity as Director with full consent of its Board of Director.
STATE OF                       )
)  SS:
COUNTY OF                   )

I HEREBY CERTIFY that on this day, before me, an officer duly authorized in the State aforesaid and in the County aforesaid to take acknowledgments, the foregoing instrument was acknowledged before me by Lau Sak Hong, the ________________________of Ram Light Management Limited, a Hong Kong corporation/ freely and voluntarily under authority duly vested in him/her by said corporation, Lau Sak Hong is personally known to me or who has produced ________________________as identification.

WITNESS my hand and official seal in the County and State last aforesaid this day of

________________________,2012.

My Commission Expires:	Notary Public
	Typed, printed or stamped name of Notary Public

EX-99.5

SUBORDINATION AGREEMENT

THIS AGREEMENT is made this         day of               , 2012, by and between Crestmark Bank, a Michigan banking corporation, having offices at 5480 Corporate Drive, Suite 350, Troy, Michigan 48098(the "Bank"), The Singing Machine Company, Inc., a Delaware corporation whose address is 6301 N.W. 5^th Way, Suite 2900, Ft. Lauderdale, FL 33309 and SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA, a Macau corporation whose address is Alameda Dr. Carlos D'Assumpacao, 181-187 Edificiio Jardim Brilhamtismo, 19 andar D, Macau (individually or collectively referred to herein as the "Borrower"), and Starlight Marketing Development Limited, whose address is 232 Aberdeen Main Road, Shing Dao Industrial Building, 5^th Floor, Hong Kong (the "Subordinating Creditor").

BACKGROUND:

As of the date hereof, Borrower is now indebted to Subordinating Creditor in the approximate aggregate amount of Eight Hundred Sixteen Thousand Seven Hundred Fifty Two and 68/100 Dollars ($816,752.68)and may in the future be owed additional sums (collectively, the "Junior Indebtedness");

Borrower is now, or will be, indebted to Bank on the date hereof in an aggregate principal amount of up to Five Million Dollars ($5,000,000), and for the Indebtedness (which may exceed the amount herein set forth) as defined in a Loan and Security Agreement executed between Bank and Borrower, as amended from time to time (collectively, the "Senior Indebtedness"); and

Subordinating Creditor is financially interested in Borrower and desires to aid Borrower in obtaining financing; and

Bank is willing to lend sums to Borrower provided Borrower and Subordinating Creditor comply with all of the terms and conditions of this Agreement.

In consideration of the mutual promises and covenants hereinafter contained, and as an inducement to Bank to advance credit and lend money to Borrower, it is jointly and severally agreed by the parties hereto as follows:

1.  Subordination of the Junior Indebtedness: Except as permitted and as conditioned in Paragraph 23, the Senior Indebtedness, and all liability of Borrower to Bank now existing or hereafter created shall be indefeasibly paid in full in cash and discharged, together with all interest, collection expenses, and reasonable attorneys' fees, and Subordinating Creditor shall receive written notice thereof from Bank, before any payment shall be accepted from or required of Borrower as to any of the Junior Indebtedness.

2.  Subordination of Lien: Subordinating Creditor, notwithstanding the order of attachment or perfection of its security interests, in the assets of the Borrower, subordinates to the Bank any and all security interests which Subordinating Creditor now has or in the future may have in the Collateral (as defined in the Loan and Security Agreement) of the Borrower together with all products and proceeds thereof. Subordinating Creditor further agrees that it will not enforce or assert any of its rights or security interests in or in any other manner interfere with Bank's security interests in the Collateral, unless and until Bank has advised Subordinating Creditor, in writing, that Borrower has indefeasibly paid in full and in cash, the Senior Indebtedness owing to Bank. By means of illustration, not limitation, Subordinating Creditor agrees that it will not seek to foreclose on any Collateral, demand or accelerate any indebtedness owing to Subordinating Creditor, assert any set-off or counterclaim, or notify account debtors of Subordinating Creditor's security interest in the proceeds of the Collateral, if any, unless and until Bank has advised Subordinating Creditor, in writing, that Borrower has satisfied, in full, the Senior Indebtedness. Furthermore, until receipt of such notice, Subordinating Creditor (i) will not assert any claim for marshalling of Borrower's assets, (ii) consents to the collection or sale of the Collateral by Bank free and clear of Subordinating Creditor's security interest, and (iii) without the necessity of demand or request by Bank, Subordinating Creditor will turn or pay over to Bank any money or the proceeds of any Collateral coming into Subordinating Creditor's possession, custody or control. In furtherance of the foregoing, at the request of Bank, Subordinating Creditor agrees that it will take any and all such action as Bank may request to facilitate the collection or sale of any Collateral by Bank or Borrower, including without limitation, the termination of Subordinating Creditor's security interest in any such Collateral. Furthermore, Subordinating Creditor consents to any and all dispositions of the Collateral now or hereafter made by Bank and waives any claims contesting the commercial reasonableness of any sales. Subordinating Creditor acknowledges that the intent of this paragraph is to place Bank in the same position as if the Collateral was not subject to Subordinating Creditor's security interest, and agrees that it will assert no claims against Bank with respect to the Collateral.

3.  Receipt of Payments: In the event Subordinating Creditor shall receive payment from Borrower in violation of the law or this Agreement, whether such payment be in cash or otherwise, Subordinating Creditor shall be liable and accountable to Bank therefore, shall be deemed to have received such payment in trust for the use and benefit of Bank, shall not commingle the same with any other funds and shall pay over and deliver such payment to Bank immediately, to be applied upon the Senior Indebtedness of Borrower to Bank if in cash, and if in form other than cash, then as the same is converted into cash. In the event of the failure of Subordinating Creditor to endorse any instrument received by Subordinating Creditor and made payable to Subordinating Creditor's order, Bank or any officer or employee is hereby irrevocably constituted and appointed attorney in fact for Subordinating Creditor, such appointment being deemed coupled with an interest, with full power to make any such endorsement, and with full power of substitution.

4.  Survival: This Agreement shall survive and remain in full force and effect in the event of any administration of the property and/or affairs of Borrower arising from any assignment for the benefit of creditors, bankruptcy, receivership, liquidation or other like proceedings; and no delay, forbearance, or omission by Bank in the exercise of any right or power accruing to it upon any default in the performance hereof by the other parties hereto, shall impair any such right or power of Bank or shall be construed to be a waiver of any such default or acquiescence therein. Possession by Bank of any note or other evidence of indebtedness made, endorsed or guaranteed by Borrower shall be conclusive evidence (but not the only means of establishing) that Borrower is indebted to Bank and that the indebtedness is covered by this Agreement. Furthermore, this Agreement shall continue in full force and effect and Bank may make advancements of credit to Borrower in reliance upon this Agreement, until terminated as otherwise provided herein. Thereafter, this Agreement shall nevertheless remain in full force and effect with respect to the Senior Indebtedness and the Junior Indebtedness, and Bank may continue to grant to Borrower renewals and/or extensions of time, and may otherwise proceed in its sole discretion in the enforcement of the Senior Indebtedness.

5.  Default: It shall be a Default under the Loan and Security Agreement if Borrower, in violation of this Agreement, shall make payment to Subordinating Creditor, whether such payment be in cash or otherwise.

6.  Amount of Debt: The amounts set opposite the signature of Subordinating Creditor below represent all of the amounts currently owing by Borrower to said Subordinating Creditor. Subordinating Creditor is the sole owner of the Junior Indebtedness.

7.  Subrogation: Until the Senior Indebtedness is indefeasibly paid in full in cash, Subordinating Creditor shall not exercise any rights of subrogation. Until the Senior Indebtedness has been indefeasibly paid infull in cash, Subordinating Creditor also transfers and assigns to Bank, as collateral security for any and all obligations of Borrower to Bank, the right to enforce the Junior Indebtedness and all of the claims or demands of Subordinating Creditor against Borrower, with full right on the part of Bank, in its own name or in the name of Subordinating Creditor, to collect and enforce said claims, by suit, proof of debt in bankruptcy, or other liquidation proceedings, or otherwise. Any proceedings shall be at the sole discretion of Bank, and Bank has no obligation to Subordinating Creditor to take any steps with regard to these claims or demands, or the Junior Indebtedness, or any collateral or other security for the Junior Indebtedness.

8.  Cumulative Rights: Upon any default or breach of this Agreement by Subordinating Creditor or Borrower, Bank shall have all of the rights and remedies available at law or equity, including those of a secured creditor under the Michigan Uniform Commercial Code, as amended from time to time. This Agreement, and the rights of the parties hereto, are in addition to, and not in lieu of, any other rights or remedies available to the parties.

9.  Consents: This Agreement and its terms shall in no way be affected or impaired by, and Subordinating Creditor hereby irrevocably consents to, without notice: (a) any increase in the Senior Indebtedness; (b) any amendment, alteration, extension, renewal, waiver, indulgence or other modification of the Loan and Security Agreement or Collateral Documents; (c) any settlement or compromise in connection with the Loan and Security Agreement, Collateral Documents or Senior Indebtedness; (d) any substitution, exchange, release or other disposition of all or any part of the Loan and Security Agreement, Collateral Documents or the Senior Indebtedness; (e) any failure, delay, neglect, act or omission by Bank to act in connection with the Loan and Security Agreement, Collateral Documents or Senior Indebtedness; (f) any advances for the purpose of performing or curing any term or covenant contained in the Loan and Security Agreement, Collateral Documents or with respect to the Senior Indebtedness to which Borrower shall be or would otherwise be in default; and (g) any other matter whether similar or dissimilar to the foregoing. The obligations and agreements of Subordinating Creditor shall be unconditional, notwithstanding any defect in the genuineness, validity, regularity or enforceability of the Senior Indebtedness or the Loan and Security Agreement, Collateral Documents or any other circumstances whether or not referred to herein, which might otherwise constitute a legal or equitable discharge or a defense to Subordinating Creditor.

10.  Insurance Proceeds: Proceeds of the Collateral include insurance proceeds, and therefore, notwithstanding anything contained in any other agreements, the priorities set forth herein shall govern the ultimate disposition of casualty insurance proceeds. Bank, as the holder of a senior security interest on the Collateral shall have the sole and exclusive right to adjust settlement of insurance claims in the event of any covered loss, theft or destruction of the Collateral. All proceeds of insurance shall inure to Bank to the extent of the Senior Indebtedness, and Subordinating Creditor shall fully cooperate in effecting the payment of insurance proceeds to Bank. In the event Bank, in its sole discretion or pursuant to an agreement with Borrower, permits the Borrower to utilize the proceeds of insurance to replace the Collateral, the consent of Bank thereto shall be deemed to include the consent of Subordinating Creditor.

11.  Waivers: Subordinating Creditor hereby waives: (a) notice of any of the events set forth in Paragraph 9; (b) notice of the creation of all or any portion of the Senior Indebtedness or an increase in the Senior Indebtedness; (c) presentment and demand for payment of any Senior Indebtedness of Borrower, notice of nonperformance, protest, notice of protest, and notice of dishonor or default in connection with any Senior Indebtedness; (d) all other notices to which Subordinating Creditor might otherwise be entitled; (e) any defense arising by reason of any disability or other defense of Borrower; (f) any right to cause a marshalling of Borrower's assets; (g) any right to require Bank to proceed against any person, including without limit Borrower or guarantor; (h) any right to require Bank to proceed against or exhaust any of Borrower's, guarantor's or any other person's security; and (i) any right to require Bank to pursue any other remedy in Bank's power. Subordinating Creditor acknowledges and agrees that Bank's rights under this Agreement are not conditioned upon pursuit by Bank of any remedy Bank may have against Borrower or guarantor or any other Person or any other security. No waiver or modification of any of Bank's rights under this Agreement shall be effective unless the waiver or modification shall be in writing and signed by an authorized officer on behalf of Bank, and each waiver or modification shall be a waiver or modification only with respect to the specific matter to which the waiver or modification relates and shall in no way impair the rights of Bank or the obligations of Subordinating Creditor to Bank in any other respect.

12.  Non-Reliance: Subordinating Creditor delivers this Agreement based solely on Subordinating Creditor's independent investigation of (or decision not to investigate) the financial condition of Borrower and is not relying on any information furnished by Bank. Subordinating Creditor assumes full responsibility for obtaining any further information concerning Borrower's financial condition, the status of the Senior Indebtedness or any other matter which Subordinating Creditor may deem necessary or appropriate now or later. Subordinating Creditor waives any duty on the part of Bank, and agrees that Subordinating Creditor is not relying upon nor expecting Bank to disclose to Subordinating Creditor any fact now or later known by Bank, whether relating to the operations or condition of Borrower, the existence, liabilities or financial condition of any guarantor of the Senior Indebtedness, the occurrence of any default with respect to the Senior Indebtedness, or otherwise, notwithstanding any effect such fact may have upon Subordinating Creditor's risk or Subordinating Creditor's rights against Borrower. Subordinating Creditor knowingly accepts the full range of risk encompassed in this Agreement, which risk includes, without limit, the possibility that Bank may demand repayment of the Senior Indebtedness at any time and that Borrower may incur Senior Indebtedness to Bank after the financial condition of Borrower, or its ability to pay Borrower's debts as they mature, has deteriorated.

13.  Joint and Several: The term "Subordinating Creditor" or "Borrower" as used in this Agreement shall, if this instrument is signed by more than one party as a Subordinating Creditor or Borrower, mean respectively Subordinating Creditor and Borrower and each of them, jointly and severally.

14.  Agreement/Choice of Laws: All parties hereto have the authority to enter into this Agreement and the execution of this Agreement has been duly authorized. This Agreement shall be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. This Agreement shall be construed according to the laws of the State of Michigan (irrespective of the state's choice of law rules).

15.  Notice: Subordinating Creditor agrees, covenants and acknowledges that in the event of any default of Borrower to Subordinating Creditor on the Junior Indebtedness to give prompt written notice thereof to Bank at the address provided herein.

16.  Survival: If after receipt of any payment of all or any part of the Senior Indebtedness, Bank is for any reason compelled to surrender the payment to any person or entity, because the payment is determined to be void or voidable as a preference, impermissible setoff, diversion of trust funds or for any other reason, then to the extent of that payment, the Senior Indebtedness shall be automatically revived and Bank's rights under this Agreement shall be automatically continued in effect without reduction or discharge for that payment, and this Agreement shall automatically continue in full force notwithstanding any contrary action which may have been taken by Bank in reliance upon that payment (including, without limit, surrender or termination of this Agreement) and any contrary action so taken shall be without prejudice to Bank's rights under this Agreement and shall be deemed to have been conditioned upon that payment having become final and irrevocable.

17.  Indemnification: Subordinating Creditor hereby assumes responsibility and liability for, and hereby holds harmless and indemnifies Bank from and against, any and all losses, damages, costs and expenses, including reasonable attorney fees, incurred or suffered, directly or indirectly, by Bank which arise in whole or in part from any breach of this Agreement by Subordinating Creditor.

18.  Severability: If any provision of this Agreement is in conflict with any statute or rule of law or is otherwise unenforceable for any reason, then that provision shall be deemed null and void to the extent of the conflict or unenforceability and shall be deemed severable, but shall not invalidate any other provision of this Agreement.

19.  Counterparts. This Agreement may be executed in several counterparts, and each executed counterpart shall constitute an original instrument, but such counterparts shall together constitute but one and the same instrument.

20.  Binding Effect: Subordinating Creditor waives notice of acceptance by Bank of this Agreement and this Agreement is immediately binding upon Subordinating Creditor. This Agreement constitutes a continuing agreement of subordination even though at times Borrower may not be indebted to Bank. Subordinating Creditor acknowledges that the aforesaid Loan and Security Agreement contemplates Money Advances and other sums being advanced, from time to time thereunder, which may be mandatory or discretionary, and that the first, valid and prior interest of Bank herein granted, subordinated to and hereinafter warranted shall remain notwithstanding the repayment, in whole or in part, of the Senior Indebtedness outstanding from time to time, until termination of the entire relationship between Borrower and Bank, and receipt of notice by Subordinating Creditor as hereinabove contemplated.

21.  Waiver of Jury Trial: BORROWER AND SUBORDINATING CREDITOR DO EACH KNOWINGLY AND VOLUNTARILY AND INTELLIGENTLY WAIVE THEIR CONSTITUTIONAL RIGHT TO A TRIAL BY JURY WITH RESPECT TO ANY CLAIM, DISPUTE, CONFLICT OR CONTENTION, IF ANY, AS MAY ARISE UNDER THIS AGREEMENT, AND AGREE THAT ANY LITIGATION BETWEEN THE PARTIES CONCERNING THIS AGREEMENT SHALL BE HEARD BY A COURT OF COMPETENT JURISDICTION SITTING WITHOUT A JURY. BORROWER AND SUBORDINATING CREDITOR HEREBY CONFIRM TO BANK THAT THEY HAVE REVIEWED THE EFFECT OF THIS WAIVER OF JURY TRIAL WITH COMPETENT LEGAL COUNSEL OF THEIR CHOICE, OR HAVE BEEN AFFORDED THE OPPORTUNITY TO DO SO, PRIOR TO SIGNING THIS AGREEMENT AND EACH ACKNOWLEDGE AND AGREE THAT BANK IS RELYING UPON THIS WAIVER IN EXTENDING THE LOAN TO BORROWER.

22.  Consent to Jurisdiction: BORROWER AND SUBORDINATING CREDITOR HEREBY WAIVE ANY PLEA OF JURISDICTION OR VENUE ON THE GROUND THAT SUCH BORROWER OR SUBORDINATING CREDITOR IS NOT A RESIDENT OF OAKLAND COUNTY, MICHIGAN, AND HEREBY SPECIFICALLY AUTHORIZE ANY ACTION BROUGHT TO ENFORCE BORROWER'S OR SUBORDINATING CREDITOR'S OBLIGATIONS TO THE BANK TO BE INSTITUTED AND PROSECUTED IN EITHER THE CIRCUIT COURT OF OAKLAND COUNTY OR A DISTRICT COURT WITHIN THE BOUNDARIES OF OAKLAND COUNTY, AS APPROPRIATE, OR IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN AT THE ELECTION OF THE BANK, AND BORROWER AND SUBORDINATING CREDITOR HEREBY SUBMIT TO THE JURISDICTION OF SUCH COURT.

23. Permitted Payments: Notwithstanding anything contained herein to the contrary, Subordinating Creditor may receive from Borrower: (i) payments on the initial $1,107,678.76 of invoices outstanding (the "Initial Invoices") in the ordinary course and when due according to their terms, provided (a) a Default (which has not been cured if a cure is permitted under the terms of the Loan and Security Agreement) has not occurred under the Loan and Security Agreement, and/or the permitted payment will not cause a Default under the Loan Agreement, and (b) Subordinating Creditor has not received notice of the occurrence of the Default, at which time upon receipt of such notice, Subordinating Credit may no longer receive payments from Borrower; and (ii) as to all other amounts other than the Initial Invoices (the "Remaining Invoices"), payments on invoices in the ordinary course, as and when due, but without acceleration or prepayment thereof for any reason, limited to the lesser of, the amount currently due under the invoices or fifty (50%) percent of Free Cash Flow measured monthly (defined as net income plus depreciation and amortization less debt service, capital expenditures, distributions, dividends, or loans to employees, shareholders or officers and affiliates) as and when due, provided (a) a Default (which has not been cured if a cure is permitted under the terms of the Loan and Security Agreement) has not occurred under the Loan and Security Agreement, and/or the permitted payment will not cause a Default under the Loan Agreement, (b) Subordinating Creditor has not received notice of the occurrence of the Default, at which time upon receipt of such notice, Subordinating Credit may no longer receive payments from Borrower, and (c) Borrower has sufficient excess availability to make repayment. In no event, however, shall Subordinating Creditor make any demand or claim against Borrower for any sums due in excess of the above amounts until all Senior Indebtedness now existing or hereafter created is indefeasibly paid in full in cash. It is agreed that the first monies paid by Borrower to Subordinating Creditor shall be applied to the Initial Invoices and all amounts thereafter will be applied to the Remaining Invoices.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above.

"BANK"		"BORROWER"
Crestmark Bank, a Michigan bank		The Singing Machine Company, Inc., a Delaware corporation
By:		By;
			Gary Atkinson
Its:	Vice President	Its:	CEO
		SMC (COMERCIAL OFFSHORE DE MACAU)
		LIMITADA
		a Macau corporation
		By:	/s/ Carol Chu Lan Lau
			Carol Chu Lan Lau
		Its :	Director

“SUBORDINATING CREDITOR”		“AMOUNT”
Starlight Marketing Development Limited		$816,752.68
	/s/ Lau Sak Hong
By:	Lau Sak Hong
Its
STATE OF                 )		On October 17, 2012, I, Lau Sak Hong have signed a subordination agreement for Starlight Marketing Development Limited in favor of Crestmark Bank in my Capacity as Director with full consent of its Board of Directors.
)   SS:
COUNTY OF             )

I HEREBY CERTIFY that on this day, before me, an officer duly authorized in the State aforesaid and in the County aforesaid to take acknowledgments, the foregoing instrument was acknowledged before me by Lau Sak Hong, the                                                of Starlight Marketing Development Limited, a Hong Kong corporation, freely and voluntarily under authority duly vested in him/her by said corporation. Lau Sak Hong is personally known to me or who has produced                                  as identification.

WITNESS my hand and official seal in the County and State last aforesaid this      day of                            , 2012.

My Commission Expires:	Notary Public
	Typed, printed or stamped name of Notary Public