NOTE 3- INCOME TAXES

The Company analyzes its deferred tax assets and liabilities at the end of each interim period and based on management’s best estimate of its full year effective tax rate recognizes cumulative adjustments to its deferred tax assets and liabilities. The Company’s effective tax rate for the fiscal year ending March 31, 2015 is estimated to be approximately 38%. The effective tax rate for the fiscal year ended March 31, 2014 was approximately 40%.

As of September 30, 2014 and March 31, 2014, The Singing Machine had gross deferred tax assets of approximately $3.3 million and $3.2 million, respectively, against which the Company recorded valuation allowances totaling approximately $0.8 million. A valuation allowance was recorded against deferred tax assets because it is more likely than not that a portion of the tax benefits from the gross deferred tax assets will not be realized. For the three month period ended September 30, 2014, the Company recorded income before income tax provision of approximately $500,000 which generated a decrease in current deferred tax assets and an income tax provision of approximately $179,000. For the six month period ended September 30, 2014, the Company recorded a loss before income tax benefit of approximately $290,000 which generated additional current deferred tax assets and an income tax benefit of approximately $111,000. Due to the seasonality of the business, the Company is expected to reverse this increase in deferred tax assets during the remainder of fiscal year ending March 31, 2015.

As of September 30, 2014 the Company is subject to U.S. Federal income tax examinations for the tax years ended March 31, 2011 through March 31, 2014.