10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For quarter ended September 30, 2019
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ______.

Commission File Number 0 - 24968

THE SINGING MACHINE COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

DELAWARE	95-3795478
(State of Incorporation )	(IRS Employer I.D. No.)

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

(Address of principal executive offices)

(954) 596-1000

(Registrant’s telephone number, including area code)

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

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

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

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

APPLICABLE ONLY TO ISSUES INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

CLASS	NUMBER OF SHARES OUTSTANDING
Common Stock, $0.01 par value	38,557,643 as of November 14, 2019

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES

INDEX

		Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets – September 30, 2019 (Unaudited)and March 31, 2019	3
	Condensed Consolidated Statements of Operations – Three and Six months ended September 30, 2019 and 2018(Unaudited)	4
	Condensed Consolidated Statements of Cash Flows - Six months ended September 30, 2019 and 2018 (Unaudited)	5
	Condensed Consolidated Statements of Shareholders’ Equity – Three and Six months ended September 30, 2019 and 2018 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements - September 30, 2019 (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	23
SIGNATURES		24

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The Singing Machine Company, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2019			March 31, 2019
	(Unaudited)
Assets
Current Assets
Cash	$	2,254,572		$	211,408
Accounts receivable, net of allowances of $331,195 and $51,096, respectively		16,249,229			1,769,404
Due from PNC Bank		-			2,236,779
Accounts receivable related party - Cosmo Communications Canada, Inc		57,465			-
Accounts receivable related party - Winglight Pacific, Ltd		1,145,196			288,941
Insurance claim receivable		1,247,981			-
Inventories, net		15,288,725			6,024,311
Prepaid expenses and other current assets		257,611			274,278
Deferred financing costs		10,000			13,333
Total Current Assets		36,510,779			10,818,454
Property and equipment, net		617,047			522,910
Deferred financing costs, net of current portion		-			3,333
Deferred tax assets		812,957			758,366
Operating Leases - right of use assets		845,703			-
Other non-current assets		194,741			90,082
Total Assets	$	38,981,227		$	12,193,145
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	17,457,261		$	842,708
Accrued expenses		1,651,888			950,773
Current portion of bank term note payable		-			125,000
Due to related party - Starlight Consumer Electronics Co., Ltd.		12,040			-
Due to related party - Starlight Electronics Co., Ltd		191,100			-
Due to related party - Starlight R&D, Ltd.		56,627			-
Revolving line of credit		4,428,588			-
Customer deposits		66,923			-
Refunds due to customers		1,648,773			31,075
Reserve for sales returns		3,230,645			896,154
Current portion of finance leases		14,681			14,414
Current portion of installment note		30,065			-
Current portion of operating lease liabilities		567,340			-
Current portion of subordinated related party debt - Starlight Marketing Development, Ltd.		802,659			815,367
Total Current Liabilities		30,158,590			3,675,491
Finance leases, net of current portion		10,096			17,499
Installment note, net of current portion		145,775			-
Operating lease liabilities, net of current portion		377,066			-
Total Liabilities		30,691,527			3,692,990
Commitments and Contingencies
Shareholders’ Equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock, Class A, $0.01 par value; 100,000 shares authorized; no shares issued and outstanding		-			-
Common stock, Class B, $0.01 par value; 100,000,000 shares authorized; 38,557,643 and 38,464,753 shares issued and outstanding, respectively		385,577			384,648
Additional paid-in capital		19,719,038			19,687,263
Subscriptions receivable		-			(2,200	)
Accumulated deficit		(11,814,915	)		(11,569,556	)
Total Shareholders’ Equity		8,289,700			8,500,155
Total Liabilities and Shareholders’ Equity	$	38,981,227		$	12,193,145

See notes to the condensed consolidated financial statements

3

The Singing Machine Company, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Net Sales	$	20,081,842		$	24,304,945		$	24,890,882		$	26,141,456
Cost of Goods Sold		14,439,522			19,098,263			18,260,856			20,543,291
Gross Profit		5,642,320			5,206,682			6,630,026			5,598,165
Operating Expenses
Selling expenses		2,488,129			2,014,664			3,147,422			2,461,364
General and administrative expenses		2,235,269			1,452,125			3,606,325			2,660,769
Depreciation		59,588			68,210			119,049			135,781
Total Operating Expenses		4,782,986			3,534,999			6,872,796			5,257,914
Income (Loss) from Operations		859,334			1,671,683			(242,770	)		340,251
Other Expenses
Interest expense		(47,639	)		(72,176	)		(50,514	)		(95,561	)
Finance costs		(3,333	)		(3,333	)		(6,666	)		(6,667	)
Total Other Expenses		(50,972	)		(75,509	)		(57,180	)		(102,228	)
Income (Loss) Before Income Tax (Provision) Benefit		808,362			1,596,174			(299,950	)		238,023
Income Tax (Provision) Benefit		(184,140	)		(378,745	)		54,591			(54,745	)
Net Income (Loss)	$	624,222		$	1,217,429		$	(245,359	)	$	183,278
Net Income (Loss) per Common Share
Basic	$	0.02		$	0.03		$	(0.01	)	$	0.00
Diluted	$	0.02		$	0.03		$	(0.01	)	$	0.00
Weighted Average Common and Common Equivalent Shares:
Basic		38,518,513			38,348,400			38,494,687			38,315,395
Diluted		39,343,383			39,530,880			38,494,687			39,497,875

See notes to the condensed consolidated financial statements

4

The Singing Machine Company, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended
	September 30, 2019			September 30, 2018
Cash flows from operating activities
Net (loss) income	$	(245,359	)	$	183,278
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation		119,049			135,781
Amortization of deferred financing costs		6,666			6,667
Change in inventory reserve		-			(81,780	)
Change in allowance for bad debts		280,099			285,919
Stock based compensation		22,504			33,330
Change in net deferred tax assets		(54,591	)		54,746
Changes in operating assets and liabilities:
Accounts receivable		(14,759,924	)		(19,152,434	)
Due from PNC Bank		2,236,779			6,212
Accounts receivable - related parties		(913,720	)		(861,538	)
Insurance claim receivable		(1,247,981	)		-
Inventories		(9,264,414	)		(4,276,018	)
Prepaid expenses and other current assets		16,667			(165,392	)
Other non-current assets		(104,659	)		(516	)
Accounts payable		16,614,553			17,040,099
Accrued expenses		827,153			831,187
Due to related parties		259,767			217,595
Customer deposits		66,923			36,691
Refunds due to customers		1,617,698			(434,300	)
Reserve for sales returns		2,334,491			740,627
Operating lease liabilities, net of operating leases - right of use assets		(27,335	)		-
Net cash used in operating activities		(2,215,634	)		(5,399,846	)
Cash flows from investing activities
Purchase of property and equipment		(213,186	)		(288,740	)
Net cash used in investing activities		(213,186	)		(288,740	)
Cash flows from financing activities
Net proceeds from revolving line of credit		4,428,588			6,877,610
Proceeds from installment note		175,840			-
Proceeds from subscription receivable		2,200			-
Proceeds from exercise of stock options		10,200			6,400
Payment of bank term note		(125,000	)		(250,000	)
Payment on subordinated debt - related party		(12,708	)		-
Payments on finance leases		(7,136	)		(4,603	)
Net cash provided by financing activities		4,471,984			6,629,407
Net change in cash		2,043,164			940,821
Cash at beginning of period		211,408			813,908
Cash at end of period	$	2,254,572		$	1,754,729
Supplemental disclosures of cash flow information:
Cash paid for interest	$	62,370		$	52,513
Equipment purchased under capital lease	$	-		$	43,526
Operating leases - right of use assets initial adoption	$	1,108,330		$	-
Operating lease liabilities - initial adoption	$	1,234,368		$	-

See notes to the condensed consolidated financial statements

5

The Singing Machine Company, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three months ended September 30, 2019 and 2018

(Unaudited)

	Preferred Stock			Common Stock				Additional Paid in		Subscriptions		Accumulated
	Shares		Amount	Shares		Amount		Capital		Receivable		Deficit			Total
Balance at June 30, 2019	-	$	-	38,497,643	$	384,977	$	19,704,436	$	-	$	(12,439,137	)	$	7,650,276
Net Income												624,222			624,222
Employee compensation-stock option								5,002							5,002
Exercise of stock options				60,000		600		9,600							10,200
Balance at September 30, 2019	-	$	-	38,557,643	$	385,577	$	19,719,038	$	-	$	(11,814,915	)	$	8,289,700
Balance at June 30, 2018	-	$	-	38,282,028	$	382,820	$	19,635,341	$	-	$	(13,235,254	)	$	6,782,907
Net lncome												1,217,429			1,217,429
Employee compensation-stock option								9,552							9,552
Exercise of stock options				80,000		800		5,600							6,400
Issuance of common stock - directors				22,725		227		12,273							12,500
Balance at September 30, 2018	-	$	-	38,384,753	$	383,847	$	19,662,766	$	-	$	(12,017,825	)	$	8,028,788

The Singing Machine Company, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the six months ended September 30, 2019 and 2018

(Unaudited)

	Preferred Stock			Common Stock				Additional Paid in		Subscriptions			Accumulated
	Shares		Amount	Shares		Amount		Capital		Receivable			Deficit			Total
Balance at March 31, 2019	-	$	-	38,464,753	$	384,648	$	19,687,263	$	(2,200	)	$	(11,569,556	)	$	8,500,155
Net Loss													(245,359	)		(245,359	)
Employee compensation-stock option								10,004								10,004
Collection of subscription receivable										2,200						2,200
Exercise of stock options				60,000		600		9,600								10,200
Issuance of common stock - directors				32,890		329		12,171								12,500
Balance at September 30, 2019	-	$	-	38,557,643	$	385,577	$	19,719,038	$	-		$	(11,814,915	)	$	8,289,700
Balance at March 31, 2018	-	$	-	38,282,028	$	382,820	$	19,624,063	$	-		$	(12,201,103	)	$	7,805,780
Net Income													183,278			183,278
Employee compensation-stock option								20,830								20,830
Exercise of stock options				80,000		800		5,600								6,400
Director fees				22,725		227		12,273								12,500
Balance at September 30, 2018	-	$	-	38,384,753	$	383,847	$	19,662,766	$	-		$	(12,017,825	)	$	8,028,788

See notes to the condensed consolidated financial statements.

6

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

OVERVIEW

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

NOTE 2 - LIQUIDITY

In August 2019, we received notification from a major customer that several containers of goods from multiple vessels purchased direct import by the customer had arrived severely water damaged. Upon inspection of the damaged goods by insurance surveyors it was their opinion that the source of the damage was due to moisture in the pallets provided by the factory which caused significant condensation and consequently water damage to the merchandise. Actual damage to the goods occurred while the goods were in transit. We have filed insurance claims on our cargo insurance policy which does provide for recovery of the sales value plus additional expenses associated with the damaged goods. As of November 14, 2019, the customer charged us back a total of approximately $1,643,000 for damaged goods consisting of sales value of approximately $1,534,000 which was recorded as a reduction in net sales and approximately $109,000 in freight costs which were expensed as a component of selling expenses on the accompanying condensed consolidated statements of operations for the three and six months ended September 30, 2019. In addition, we have incurred additional related expenses of approximately $219,000 that were included as a component of general and administrative expenses on the accompanying condensed consolidated statements of operations for the three and six months ended September 30, 2019. We continue to gather the relevant information required to complete the insurance claims, however due to the significant extent of the damage more time will be required to determine the final claim settlement. As such, we have recorded a refund due to the customer of approximately $1,643,000 and recognized an insurance claim receivable of approximately $1,248,000 (the approximate cost of the damaged goods returned that will be destroyed) on the accompanying condensed consolidated balance sheet at September 30, 2019. The time of the collection of this insurance claim receivable is uncertain at this time.

As of September 30, 2019 the Company was in default on the Revolving Credit Facility due to non-compliance with the fixed charge coverage ratio in part due to the loss of margin and expenses associated with the damaged goods discussed above. In November 2019, the Company entered into a Forbearance Agreement with PNC Bank National Association (“PNC”) whereby PNC “forbears” taking action it would be entitled to under a default through March 31, 2020 at which time we would renegotiate renewal of the Revolving Credit Facility or obtain alternative financing. The Forebearance Agreement requires, among other matters, the Company to comply with certain conditions and covenants including the following:

● PNC will implement a $1,000,000 loan availability block.

● PNC will require an EBITDA hurdles of greater than or equal to $400,000 for the third quarter ending December 31, 2019, of $0 for the six months ending March 31, 2020 and $(83,000) for the twelve months ending March 31, 2020.

● PNC will charge a loan pricing increase of .5% until March 31, 2020 which would continue until the Company achieves compliance with the original fixed charge coverage ratio test of 1.1:1

Despite the loan additional availability block and EBITDA hurdles summarized above, management remains confident that there is still adequate availability on the Revolving Credit Facility and that ultimately the collection of the insurance claim will satisfy these hurdles and the Company expects to cure these defaults prior to the expiration of the current Revolving Credit Facility on July 15, 2020. While management intends to negotiate renewal of the Revolving Credit Facility prior to expiration and is exploring alternate sources of financing, there can be no assurance that these efforts will be successful or that any new terms will be as favorable.

NOTE 3 - SUMMARY OF ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements. The accompanying unaudited financial statements for the three and six months ended September 30, 2019 and 2018 have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet information as of March 31, 2019 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019. The interim condensed consolidated financial statements should be read in conjunction with that report.

7

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

USE OF ESTIMATES

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

COLLECTIBILITY OF ACCOUNTS RECEIVABLE

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

The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices.

Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations.

FOREIGN CURRENCY TRANSLATION

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

Concentration of Credit Risk

At times, the Company maintains cash in United States bank accounts that are more than the Federal Deposit Insurance Corporation insured amounts. The Company also maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at September 30, 2019 and March 31, 2019 are approximately $2,134,000 and $211,000, respectively.

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

INVENTORY

Inventories are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected future inventory returns due to warranty and allowance programs. As of September 30, 2019 and March 31, 2019 the estimated amounts for these future inventory returns were approximately $1,857,000 and $599,000, respectively. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of September 30, 2019 and March 31, 2019 the Company had inventory reserves of approximately $254,000 for estimated excess and obsolete inventory.

LONG-LIVED ASSETS

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

PROPERTY AND EQUIPMENT

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

8

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

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

REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS

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

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

The Company disaggregates revenues by major geographic region as most of its revenue is generated by the sales of karaoke hardware and the Company has no other material business segments (See NOTE 9).

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

The Company’s reserve for sales returns were approximately $3,231,000 and $896,000 as of September 30, 2019 and March 31, 2019, respectively.

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

	Three Months Ended				Six Months Ended
Product Line		9/30/2019		9/30/2018		9/30/2019		9/30/2018
Classic Karaoke Machines	$	11,737,193	$	15,496,872	$	15,893,233	$	16,507,383
Download Karaoke Machines		4,005,488		5,792,683		4,146,488		6,003,683
SMC Kids Toys		418,716		1,466,087		558,716		1,593,087
Music and Accessories		3,920,445		1,549,303		4,292,445		2,037,303
Total Net Sales	$	20,081,842	$	24,304,945	$	24,890,882	$	26,141,456

SHIPPING AND HANDLING COSTS

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

STOCK BASED COMPENSATION

The Company follows the provisions of the FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the condensed consolidated statements of operations over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense for the three and six months ended September 30, 2019 and 2018 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award. For the three months ended September 30, 2019 and 2018, the stock option expense was approximately $5,000 and $10,000, respectively. For the six months ended September 30, 2019 and 2018, the stock option expense was $10,000 and $21,000, respectively.

ADVERTISING

Costs incurred for producing and publishing advertising of the Company are charged to operations the first time the advertising takes place. The Company has entered into cooperative advertising agreements with its major customers that specifically indicate that the customer must spend the cooperative advertising fund upon the occurrence of mutually agreed events. The percentage of the cooperative advertising allowance ranges from 1% to 13% of the purchase. The customers must advertise the Company’s products in the customer’s catalog, local newspaper and other advertising media. The customer must submit the proof of the performance (such as a copy of the advertising showing the Company’s products) to the Company to request for the allowance. The customer does not have the ability to spend the allowance at their discretion. The Company believes that the identifiable benefit from the cooperative advertising program and the fair value of the advertising benefit is equal or greater than the cooperative advertising expense. Advertising expense for the three months ended September 30, 2019 and 2018 was approximately $1,419,000 and $1,280,000, respectively. Advertising expense for the six months ended September 30, 2019 and 2018 was approximately $1,780,000 and $1,549,000, respectively As of September 30, 2019 and March 31, 2019 there was an accrual for cooperative advertising allowances of $664,000 and $185,000, respectively. These amounts were a component of accrued expenses in the condensed consolidated balance sheets.

9

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to results of operations as incurred. These expenses are shown as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. For the three months ended September 30, 2019 and 2018, these amounts totaled approximately $18,000 and $21,000, respectively. For the six months ended September 30, 2019 and 2018, these amounts totaled $23,000 and $37,000 respectively.

INCOME TAXES

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

The Company analyzes its deferred tax assets and liabilities at the end of each interim period and, based on management’s best estimate of its full year effective tax rate, recognizes cumulative adjustments to its deferred tax assets and liabilities. For the six months ended September 30, 2019 and 2018 we estimated our effective tax rate to be approximately 18% and 23%, respectively. As of September 30, 2019 and March 31, 2019, the Singing Machine had gross deferred tax assets of approximately $813,000 and $758,000, respectively. The Company recorded an income tax provision of approximately $184,000 and $378,000 for the three months ended September 30, 2019 and 2018, respectively. The Company recorded an income tax benefit of approximately $55,000 for the six months ended September 30, 2019 and an income tax provision of approximately $55,000 for the six months ended September 30, 2018.

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

COMPUTATION OF EARNINGS PER SHARE

Income per common share is computed by dividing net income by the weighted average of common shares outstanding during the period. As of September 30, 2019 and 2018 total potential dilutive shares from common stock options amounted to approximately 2,250,000 and 2,350,000 shares, respectively. These shares were not included in the computation of diluted earnings per share for the six months ended September 30, 2019 because their effect was anti-dilutive. These shares were included in the computation of diluted earnings per share for the three months ended September 30, 2019 and 2018 and six months ended September 30, 2018.

ADOPTION OF NEW ACCOUNTING STANDARDS

In February 2016, the FASB issued ASU 2016-02, Topic 842, as amended, “Leases”. The ASU requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. On April 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its disclosures for the comparative periods. (See Note 7– LEASES).

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

10

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326). This ASU represents a significant change in the current accounting model by requiring immediate recognition of management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which delayed recognition of expected losses that might not yet have met the threshold of being probable. The amendments in ASU 2016-03 are effective for fiscal years beginning after April 1, 2020 including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of this updated guidance on our consolidated financial statements and related disclosures.

NOTE 4 - INVENTORIES, NET

Inventories are comprised of the following components:

	September 30, 2019		March 31, 2019
Finished Goods	$	10,948,842	$	5,679,245
Inventory in Transit		2,736,639		-
Estimated Amount of Future Returns		1,857,244		599,066
Subtotal		15,542,725		6,278,311
Less:Inventory Reserve		254,000		254,000
Inventories, net	$	15,288,725	$	6,024,311

NOTE 5 – PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

	USEFUL		September 30,		March 31,
	LIFE		2019		2019
Computer and office equipment		5 years	$	134,101	$	140,575
Furniture and fixtures		7 years		98,410		98,410
Warehouse equipment		7 years		195,401		209,419
Molds and tooling		3-5 years		1,686,497		1,466,837
				2,114,409		1,915,241
Less: Accumulated depreciation				1,497,362		1,392,331
			$	617,047	$	522,910

Depreciation expense for the three months ended September 30, 2019 and 2018 was approximately $60,000 and $68,000, respectively. Depreciation expense for the six months ended September 30, 2019 and 2018 was approximately $119,000 and $136,000, respectively.

NOTE 6 – BANK FINANCING

Revolving Credit Facility

On June 22, 2017, the Company renewed the existing revolving credit facility (the “Revolving Credit Facility”) with PNC for an additional three years expiring on July 15, 2020. The outstanding loan balance cannot exceed $15,000,000 during peak selling season between August 1 and December 31 (with the ability of the Company to request an additional $5,000,000 of availability during peak selling season if required) and is reduced to a maximum of $7,500,000 between January 1 and July 31. At September 30, 2019 and March 31, 2019, the outstanding balance was approximately $4,400,000 and $0, respectively, on the Revolving Credit Facility. As of September 30, 2019, there was approximately $10,600,000 available to borrow on the Revolving Credit Facility. Usage under the Revolving Credit Facility shall not exceed the sum of the following (the “Borrowing Base”):

● Up to 85% of the company’s eligible domestic and Canadian accounts receivable and up to 90% of eligible foreign credit insured accounts aged less than 60 days past due (not to exceed 90 days from invoice date, cross aged on the basis of 50% or more past due with certain specific accounts qualifying for up to 120 days from invoice date not to exceed 30 days from the due date; plus

● Up to the lesser of (a) 60% of the cost of eligible inventory or (b) 85% of net orderly liquidation value percentage of eligible inventory (annual inventory appraisals required); minus

● Applicable reserves including a dilution reserve equal to 100% of the Company’s advertising and return accrual reserves. Dilution reserve not to exceed availability generated from eligible accounts receivable.

11

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

The Revolving Credit Facility includes the following sub-limits:

● Letters of Credit to be issued limited to $3,000,000.

● Inventory availability limited to $5,000,000.

● $500,000 eligible in-transit inventory sublimit within the $5,000,000 total inventory.

● Mandatory pay-down to $1,000,000 (excluding letters of credit) for any 30 consecutive days between February 1 and April 30.

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

● Fixed charge coverage ratio test of 1.1:1 times measured on a rolling four quarter basis, defined as EBITDA less non-financed capital expenditures, cash dividends and distributions paid and cash taxes paid divided by the sum of interest and principal on all indebtedness.

● Capital expenditures limited to $375,000 per year

As of September 30, 2019 the Company was in default on the Revolving Credit Facility due to non-compliance with the fixed charge coverage ratio in part due to the loss of margin and related expenses associated with the damaged goods received by one major customer in August, 2019. In November 2019, the Company entered into a Forbearance Agreement with PNC whereby PNC “forbears” taking action it would be entitled to under a default through March 31, 2020 and would continue forbearance actions provided the Company continued to meet compliance with certain conditions (See Note 2 – LIQUIDITY).

Absent the Forbearance Agreement interest on the Revolving Line of Credit is accrued at .75% per annum over PNC’s announced prime rate with an option for the Company to elect the 1, 2 or 3 month fully absorbed PNC LIBOR Rate plus 2.75% per annum with a default rate of 2% over the applicable rate. There is an unused facility fee equal to .375% per annum on the unused portion of the Revolving Credit Facility which will be calculated on the basis of a 360 day year for the actual number of days elapsed and will be payable quarterly in arrears. During the three months ended September 30, 2019 and 2018 the Company incurred interest expense of approximately $32,000 and $50,000, respectively, on amounts borrowed against the Revolving Credit Facility. During the six months ended September 30, 2019 and 2018, the Company incurred interest expense of approximately $33,000 and $55,000, respectively on amounts borrowed against the Revolving Credit Facility. During the three months ended September 30, 2019 and 2018, the Company incurred an unused facility fee of approximately $14,000 and $8,000, respectively on the unused portion of the Revolving Credit Facility. During the six months ended September 30, 2019 and 2018, the Company incurred an unused facility fee of approximately $20,000 and $15,000, respectively on the unused portion of the Revolving Credit Facility.

The Revolving Line of Credit is secured by first priority security interests in all of the named borrowers’ tangible and intangible assets as well as first priority security interests of 100% of member or ownership interests of any of its domestic existing or newly formed subsidiaries and first priority lien on up to 65% of the borrowers’ foreign subsidiary’s existing or subsequently formed or acquired foreign subsidiaries. The Revolving Credit Facility is also secured by a related-party debt subordination agreement with Starlight Marketing Development, Ltd. in the amount of approximately $803,000. Costs associated with renewal of the Revolving Credit Facility of approximately $40,000 were deferred and are being amortized over the term of the agreement. During the three months ended September 30, 2019 and 2018, the Company incurred amortization expense of approximately $3,000 associated with the amortization of deferred financing costs from the original Revolving Credit Facility. During the six months ended September 30, 2019 and 2018 the Company incurred amortization expense of approximately $7,000 associated with the amortization of deferred financing costs from the original Revolving Credit Facility.

Subordinated Related Party Debt

The subordination agreement was amended reducing the amount of related party subordinated debt to the remaining amount due of approximately $815,000. Provision has also been made to allow repayment of the remaining $815,000 in quarterly installments of $123,000 including interest accrued at 6% per annum commencing September 30, 2017 and ending on the debt maturity date of June 30, 2019. There are no provisions to continue accruing interest on the outstanding principal amount due as of June 30, 2019. Payments of $123,000 are only permitted upon receipt of the Company’s quarterly compliance certificate; the Company having met the mandatory pay-down of the Revolving Credit Facility to $1,000,000 and average excess availability for the prior 30 days (after subtraction of third party trade payables 30 days or more past due) of no less than $1,000,000 after giving effect to the payment. As part of the Conditions to Installment Payment of the subordinated debt, payments not made under this note that cannot be made as a result of the foregoing prohibition, including payments after the scheduled maturity date, shall not be deemed an Event of Default and can be made as soon as the Company is able to demonstrate that it meets the liquidity requirements defined above. Quarterly installment payments of $123,000 due on the last day of each fiscal quarter have not been made since September 2017 due to the Company not meeting these requirements; a payment of $123,000 which includes principal and interest, was made during the three and six months ended September 30, 2019. A payment of $25,000 was made in August 2019 with approximately $12,500 paying down the principal and approximately $12,500 paying interest due. During the three months ended September 30, 2019 and 2018, the Company incurred interest expense of approximately $0 and $7,000 respectively on the related party subordinated debt. During the six months ended September 30, 2019 and 2018, the Company incurred interest expense of approximately $2,000 and $16,000, respectively on the related party subordinated debt. As of September 30, 2019 and March 31, 2019, the remaining amount due on the subordinated related party debt was approximately $803,000 and $815,000, respectively

12

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

Bank Term Note

The Company repaid the final $125,000 installment of a term loan with PNC which originated in fiscal year 2018.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

LEASES

Operating Leases

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

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

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

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

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

Finance Leases

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

Supplemental balance sheet information related to leases as of September 30, 2019 is as follows:
Assets:
Operating lease - right-of-use assets	$	845,703
Finance leases as a component of Property and equipment, net of accumulated depreciation of $8,809		34,717
Liabilities
Current
Current portion of operating leases	$	567,340
Current portion of finance leases		14,681
Noncurrent
Operating lease liabilities, net of current portion	$	377,066
Finance leases, net of current portion		10,096

Supplemental statement of operations information related to leases for the three and six months ended September 30, 2019 is as follows:
	Three Months Ended		Six Months Ended
	September 30 2019		September 30 2019
Operating lease expense as a component of general and administrative expenses	$	148,724	$	297,448
Finance lease cost
Depreciation of leased assets as a component of depreciation	$	1,555	$	3,110
Interest on lease liabilities as a component of interest expense	$	250	$	533

Supplemental cash flow information related to leases for the six months ended September 30, 2019 is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow paid for operating leases			$	324,783
Financing cash flow paid for finance leases			$	7,136
Lease term and Discount Rate
Weighted average remaining lease term (months)	31.7
Operating leases	20.0
Finance leases
Weighted average discount rate
Operating leases	6.25	%
Finance leases	3.68	%

13

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

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

Year	Operating Leases		Finance Leases
2020, for the remaining 6 months	$	326,374	$	7,673
2021		348,562	$	15,347
2022		115,814		2,558
2023		117,638		-
2024		121,167		-
Total Minimum Future Payments		1,029,555		25,578
Less: Imputed Interest		85,149		801
Present Value of Lease Liabilities	$	944,406	$	24,777

Installment Note

On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance a new Enterprise Resource Planning (“ERP”) System project over a term of 60 months at a cost of approximately $375,000. Dimension has a 100% security interest in the licensed software being financed. We estimate the system to be placed in service on April 1, 2020. Upon approval by Company management, Dimension will release progress payments directly to the project consultants as specific project milestones are met. Total progress payments will be made to the vendor over a period of approximately nine months and the Company will be charged financing costs on the amounts preapproved for the project. Payments advanced by Dimension to the project consultant during the three and six months ended September 30, 2019 totaled approximately $176,000. This amount was converted to an installment note which calls for estimated monthly installment payments of approximately $3,530 (including principal and interest) over a 60 month period and bears interest of approximately 7.58%. The initial installment payment was due on October 1, 2019. Total financing charges on the financing arrangement was approximately $7,000 for the three and six months ended September 30, 2019.

LEGAL MATTERS

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

NOTE 8 - STOCK OPTIONS

During the six months ended September 30, 2019 the Company issued 100,000 stock options at an exercise price of $.38 to directors as compensation for their service.

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

● For six months ended September 30, 2019: expected dividend yield of 0%, risk-free interest rate of 2.08%, volatility of 112.3% and an expected term of three years.

A summary of stock option activity for the six months ended September 30, 2019 is summarized below:

	September 30, 2019
	Number of Options			Weighted Average Exercise Price
Stock Options:
Balance at beginning of period		2,210,000		$	0.25
Granted		100,000		$	0.38
Exercised		(60,000	)	$	0.17
Balance at end of period		2,250,000		$	0.26
Options exercisable at end of period		2,150,000		$	0.25

14

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

The following table summarizes information about employee stock options outstanding at September 30, 2019:

Range of Exercise Price	Number Outstanding at September 30, 2019		Weighted Average Remaining Contractural Life		Weighted Average Exercise Price		Number Exercisable at September 30, 2019		Weighted Average Exercise Price
$.03 - $.32		1,570,000		3.7		0.16		1,570,000		0.16
$.38 - $.55		680,000		8.3		0.42		580,000		0.50
*		2,250,000						2,150,000

* Total number of options outstanding as of September 30, 2019 includes 500,000 options issued to five current and two former directors as compensation and 1,150,000 options issue to key employees that were not issued from the Plan.

As of September 30, 2019 there was unrecognized expense of approximately $10,000 remaining on options currently vesting over time with approximately six months remaining until these options are fully vested.

The intrinsic value of vested options as of September 30, 2019 was approximately $134,000.

NOTE 9 – COMMON STOCK ISSUANCES

On June 12, 2019, the Company issued 32,890 shares of its common stock to its Board of Directors valued at $0.38 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2019. The Company recorded director compensation of $0 and $12,500 during the three and six months ended September 30, 2019.

NOTE 10 - GEOGRAPHICAL INFORMATION

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

	FOR THE THREE MONTHS ENDED				FOR THE SIX MONTHS ENDED
	September 30,				September 30,
	2019		2018		2019		2018
North America	$	16,263,563	$	21,118,623	$	20,877,336	$	22,910,537
Europe		3,439,976		3,003,899		3,539,400		3,042,771
Australia		378,303		179,923		474,146		179,923
Others		-		2,500		-		8,225
	$	20,081,842	$	24,304,945	$	24,890,882	$	26,141,456

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

NOTE 11 –RELATED PARTY TRANSACTIONS

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

DUE TO/FROM RELATED PARTIES

On September 30, 2019 and March 31, 2019, in the aggregate the Company had approximately $1,203,000 and $289,000, respectively, due from related parties for goods and services sold to these companies.

On September 30, 2019 and March 31, 2019, the Company had amounts due to related parties in the amounts of approximately $260,000 and $0 for engineering fees, storage and administrative services provided to the Company by these related parties.

Subordinated Related Party Debt

In connection with the Revolving Credit Facility the Company was required to subordinate related party debt to Starlight Marketing Development, Ltd. (“subordinated debt”). The subordinated debt of approximately $924,000 bears interest at 6% and is scheduled to be paid in quarterly installments of $123,000 which include interest and commenced September 30, 2017 and ending on the debt maturity date of June 30, 2019. There are no provisions to continue accruing interest on the outstanding amount due as of June 30, 2019. The remaining amount due on the subordinated debt of approximately $803,000 and $815,000 were classified as a current liability as of September 30, 2019 and March 31, 2019, respectively on the condensed consolidated balance sheets. Quarterly installment payments of $123,000 due on the last day of each fiscal quarter have not been made since September 2017; however a payment of $25,000 which includes principal and interest, was made during the three and six months ended September 30, 2019. During the three months ended September 30, 2019 and 2018 the Company incurred interest expense of approximately $0 and $7,000 respectively on the related party subordinated debt. During the six months ended September 30, 2019 and 2018 the Company incurred interest expense of approximately $2,000 and $16,000, respectively on the related party subordinated debt.

15

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

TRADE

During the three months ended September 30, 2019 and 2018 the Company sold approximately $778,000 and $1,150,000, respectively to Winglight Pacific, Ltd. (“Winglight”), a related party, at a discounted price similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for the three months ended September 30, 2019 and 2018 was 23.9% and 30.1%, respectively. The product was shipped to Cosmo Communications of Canada (“Cosmo”), another related company and the Company’s primary distributor of its products to Canada. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations.

During the three months ended September 30, 2019 and 2018 the Company sold approximately $168,000 and $593,000, respectively of product directly to Cosmo from its California warehouse facility. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations.

During the six months ended September 30, 2019 and 2018 the Company sold approximately $852,000 and $1,150,000, respectively to Winglight at a discounted price similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for the six months ended September 30, 2019 and 2018 was 23.7% and 30.1%, respectively. The product was shipped to Cosmo. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations.

During the six months ended September 30, 2019 and 2018 the Company sold approximately $239,000 and $638,000, respectively of product directly to Cosmo from its California warehouse facility. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations.

The Company incurred service expenses from Starlight Electronics Co, Ltd, (“SLE”) a related party. The services from SLE for the three months ended September 30, 2019 and 2018 were approximately $90,000, and $85,000 respectively. The services from SLE for the six months ended September 30, 2019 and 2018 were approximately $191,000 and $181,000 respectively. These amounts were included as a component of general and administrative expenses in the accompanying condensed consolidated statements of operations.

NOTE 12 – RESERVE FOR SALES RETURNS

A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months). The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates.

The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the condensed consolidated balance sheets.

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

	Six Months Ended
	September 30,			September 30,
	2019			2018
Reserve for sales returns at beginning of the period	$	896,154		$	726,000
Provision for estimated sales returns		3,543,813			1,883,366
Sales returns received		(1,209,322	)		(1,142,739	)
Reserve for sales returns at end of the period	$	3,230,645		$	1,466,627

16

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

NOTE 13 – REFUNDS DUE TO CUSTOMERS

As of September 30, 2019 and March 31, 2019 the amount of refunds due to customers was approximately $1,649,000 and $31,000, respectively. We have received total chargebacks of approximately $1,643,000 for damaged goods received by one major customer in August 2019 (See Note 2 – LIQUIDITY). As such, we have recorded a refund due to the customer of approximately $1,643,000 on the accompanying condensed consolidated balance sheet at September 30, 2019.

NOTE 14 - EMPLOYEE BENEFIT PLANS

The Company has a 401(k) plan for its employees to which the Company makes contributions at rates dependent on the level of each employee’s contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to operations for contributions to this plan and administrative costs during the three months ended September 30, 2019 and 2018 totaled approximately $18,000 and $17,000, respectively. The amounts charged to operations for contributions to this plan and administrative costs during the six months ended September 30, 2019 and 2018 totaled approximately $32,000 and $33,000, respectively. The amounts are included as a component of general and administrative expense in the accompanying condensed consolidated statements of operations. The Company does not provide any post-employment benefits to retirees.

NOTE 15 - CONCENTRATIONS OF CREDIT AND SALES RISK

The Company derives a majority of its revenues from retailers of products in the United States. The Company’s allowance for doubtful accounts is based upon management’s estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers. At September 30, 2019, 84% of accounts receivable were due from three customers in North America that individually owed over 10% of total accounts receivable. At March 31, 2019, 62% of accounts receivable were due from three customers in North America that individually owed over 10% of total accounts receivable.

The Company generates most of its revenue from retailers of products in the United States with a significant amount of sales concentrated with several large customers the loss of which could have an adverse impact on the financial position of the Company. For the three months ended September 30, 2019, there were three customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 36%, 13%, and 11% respectively. For the three months ended September 30, 2018, there were three customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 29%, 11% and 11%, respectively.

For the six months ended September 30, 2019, there were two customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from this customer as a percentage of net sales were 43% and 10%, respectively . For the six months ended September 30, 2018, there were three customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 28%, 11% and 11%, respectively.

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

FORWARD-LOOKING STATEMENTS

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

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

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

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

OVERVIEW

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

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

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

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

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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items related to our consolidated statements of operations as a percentage of net sales for the three and six months ended September 30, 2019 and 2018:

The Singing Machine Company, Inc. and Subsidiaries

CONDENDSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For Three Months Ended						For Six Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Goods Sold		71.9	%		78.6	%		73.4	%		78.6	%
Gross Profit		28.1	%		21.4	%		26.6	%		21.4	%
Operating Expenses
Selling expenses		12.4	%		8.3	%		12.6	%		9.4	%
General and administrative expenses		10.0	%		5.9	%		13.6	%		10.2	%
Damage claim expense		1.1	%		0.0	%		0.9	%		0.0	%
Depreciation and amortization		0.3	%		0.4	%		0.5	%		0.5	%
Total Operating Expenses		23.8	%		14.6	%		27.6	%		20.1	%
Income (Loss) from Operations		4.3	%		6.8	%		-1.0	%		1.3	%
Other Expenses
Interest expense		-0.2	%		-0.3	%		-0.2	%		-0.4	%
Financing costs		0.0	%		0.0	%		0.0	%		0.0	%
Total Other Expenses		-0.2	%		-0.3	%		-0.2	%		-0.4	%
Income (Loss) Before Income Tax (Provision) Benefit		4.1	%		6.5	%		-1.2	%		0.9	%
Income Tax (Provision) Benefit		-0.9	%		-1.6	%		0.2	%		0.0	%
Net Income (Loss)		3.2	%		4.9	%		-1.0	%		0.9	%

QUARTER ENDED SEPTEMBER 30, 2019 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2018

NET SALES

Net sales for the quarter ended September 30, 2019 decreased to approximately $20,082,000 from $24,305,000 a decrease of approximately $4,223,000 as compared to the same period ended September 30, 2018. Sales to our Canadian and UK distributors decreased by approximately $2,743,000 due to excess stock left over from the prior season. In August 2019, we received notification from a major customer that several containers of goods from multiple vessels purchased direct import by the customer had arrived severely water damaged. As of November 14, 2019, the customer charged us back for the sales value of damaged goods returned to us resulting in a reduction in net sales of approximately $1,534,000 which was the primary reason for the remaining decrease in net sales for the three months ended September 30, 2019.

GROSS PROFIT

Gross profit for the quarter ended September 30, 2019 increased to approximately $5,642,000 from $5,207,000 an increase of approximately $435,000 as compared to the same period in the prior year. There was an increase in gross profit of approximately $1,300,000 due primarily to higher margin yield on the new Carpool Karaoke The Mic product introduced in fiscal 2020. This increase was offset by approximately $500,000 due primarily to the decrease in sales to our Canadian and UK distributors as discussed above in net sales and a decrease of approximately $286,000 in margin due to the reduction in net sales due to the return of damaged goods from a major customer as explained in net sales.

Gross profit margin for the three months ended September 30, 2019 was 28.1% compared to 21.4% for the three months ended September 30, 2018. The sale of Carpool Karaoke The Mic introduced in fiscal 2020 accounted for approximately 4.3 points of the gross profit margin increase with the remaining 2.4 points of margin increase primarily due to the mix of product sold.

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OPERATING EXPENSES

For the quarter ended September 30, 2019, total operating expenses increased to approximately $4,783,000 compared to approximately $3,535,000 from the same period in the prior year. This represents an increase in total operating expenses of approximately $1,248,000 from the quarter ended September 30, 2018. Selling expenses increased by approximately $473,000, primarily due to marketing and royalty expenses associated with Carpool Karaoke The Mic. There was an increase in freight costs of approximately $109,000 due to in-bound freight and handling charged by one major customer for the return of damaged goods as explained in net sales.

General and administrative expenses increased by approximately $783,000 to approximately $2,235,000 for the three months ended September 30, 2019 compared to approximately $1,452,000 for the same period ended September 30, 2018. There was an increase of approximately $269,000 in bad debt expense primarily due to recovery of bad debt from the Toys R Us bankruptcy during the three months ended September 30, 2018 of approximately $249,000 compared to no significant recovery of bad debt expenses during the three months ended September 30, 2019. There was approximately $219,000 in administrative expenses relating to the processing of damaged goods received by one major customer as explained in net sales above. Insurance expense increased $135,000 over the same period ending September 30, 2018 due to accounts receivable insurance purchased for a major customer. There was an increase cost of the logistics operation of approximately $100,000 primarily due to expediting of goods received into inventory related to the timing and uncertainty of new tariff assessments with the remaining variance due to other variable administrative expenses.

INCOME FROM OPERATIONS

There was income from operations of approximately $859,000 for the three months ended September 30, 2019 compared to income from operations of approximately $1,672,000 for the three months ended September 30, 2018. The decrease in income from operations of approximately $813,000 was primarily due to the increase in operating expenses offset by the increase in gross profit as explained above.

INCOME TAXES

For the three months ended September 30, 2019 and 2018 the Company recognized an income tax provision of approximately $184,000 and $379,000, respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately 18.3% and 23.9%, respectively.

NET INCOME

For the three months ended September 30, 2019 there was net income of approximately $624,000 compared to net income of approximately $1,217,000 for the same period a year ago. The decrease in net income was primarily due to the same reasons discussed in Income from Operations and Income Taxes.

SIX MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2018

NET SALES

Net sales for the six months ended September 30, 2019 decreased to approximately $24,891,000 from $26,141,000 a decrease of approximately $1,250,000 as compared to the same period ended September 30, 2018. Sales to our Canadian and UK distributors decreased by approximately $2,157,000 due to excess stock left over from the prior season. In August 2019, we received notification from a major customer that several containers of goods from multiple vessels purchased direct import by the customer had arrived severely water damaged. As of November 14, 2019, the customer charged us back for the sales value of damaged goods returned to us resulting in a reduction in net sales of approximately $1,534,000. These decreases in sales were offset by an increase in shipments of the new Carpool Karaoke The Mic product of approximately $2,046,000 to several major customers for the product launch event. The remaining increase in sales of approximately $395,000 was primarily due to the mix of products sold.

GROSS PROFIT

Gross profit for the six months ended September 30, 2019 increased to approximately $6,630,000 from approximately $5,598,000 an increase of approximately $1,032,000 as compared to the same period in the prior year. Almost all of the increase was due to the increased sales and gross profit margin from the new Carpool Karaoke The Mic product.

Gross profit margin for the six months ended September 30, 2019 was 26.6% compared to 21.4% for the six months ended September 30, 2018. The sale of the new Carpool Karaoke The Mic introduced in fiscal 2020 accounted for approximately 3.9 points of the gross profit margin increase with the remaining 1.3 points of margin increase primarily due to the mix of product sold.

OPERATING EXPENSES

For the six months ended September 30, 2019, total operating expenses increased to approximately $6,873,000 compared to approximately $5,258,000 from the same period in the prior year. This represents an increase in total operating expenses of approximately $1,615,000 from the six months ended September 30, 2018. Selling expenses increased by approximately $686,000, primarily due to marketing commission and royalty expenses of approximately $522,000 associated with the Carpool Karaoke The Mic product. There was an increase in freight costs of approximately $109,000 due to in-bound freight and handling charged by one major customer for the return of damaged goods as explained in net sales.

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General and administrative expenses increased by approximately $945,000 to approximately $3,606,000 for the six months ended September 30, 2019 compared to approximately $2,661,000 for the same period ended September 30, 2018. There was an increase of approximately $335,000 in bad debt expense primarily due to recovery of bad debt from the Toys R Us bankruptcy during the six months ended September 30, 2018 of approximately $325,000 compared to no significant recovery of bad debt expenses during the three months ended September 30, 2019. Insurance expense increased approximately $135,000 over the same period ending September 30, 2018 due to accounts receivable insurance purchased for a major customer. There was an increase in the cost of the logistics operation of approximately $177,000 primarily due to expediting of goods received into inventory related to the timing and uncertainty of new tariff assessments and special projects. There was approximately $219,000 in administrative expenses relating to the processing of damaged goods received by one major customer as explained in net sales with the remaining variance due to other variable administrative expenses.

(LOSS) INCOME FROM OPERATIONS

There was a loss from operations of approximately $243,000 for the six months ended September 30, 2019 compared to income from operations of approximately $340,000 for the six months ended September 30, 2018. The decrease in income from operations of approximately $583,000 was primarily due to the increase in operating expenses offset by the increase in gross profit as explained above.

INCOME TAXES

For the six months ended September 30, 2019 and 2018 the Company recognized an income tax benefit of approximately $55,000 and an income tax provision of approximately $55,000, respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately 18.3% and 23.9%, respectively.

NET (LOSS) INCOME

For the six months ended September 30, 2019 there was a net loss of approximately $245,000 compared to net income of approximately $183,000 for the same period a year ago. The decrease in net income was primarily due to the same reasons discussed in (Loss) Income from Operations and Income Taxes.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2019, Singing Machine had cash on hand of approximately $2,255,000 as compared to cash on hand of approximately $211,000 on March 31, 2019. We had working capital of approximately $6,352,000 as of September 30, 2019. Net cash used in operating activities was approximately $2,216,000 for the six months ended September 30, 2019, as compared to approximately $5,400,000 used in operating activities for the same period a year ago. During the six months ended September 30, 2019 there was an increase in accounts receivable of approximately $14,760,000 due to seasonal increase in sales, an increase in inventories of approximately $9,264,000 due to peak seasonal purchases as well as expedited inventory receipts in order to mitigate increased costs due to new tariff assessments. There was an increase in insurance claim receivable of approximately $1,248,000 relating to damaged goods claims from one customer (See Note 2 – LIQUIDITY). These increases in cash used in operating activities were offset by an increase in accounts payable of approximately $16,615,000 due to seasonal purchases of product for the peak season, an increase in reserve for sales returns of approximately $2,334,000 of which approximately $1,100,000 is due to anticipated return of new product from one major customer. There was a decrease in amounts due from PNC bank of approximately $2,237,000 due to excess cash collected in excess of amounts due on the Revolving Credit facility at year end being utilized in peak season operations and an increase in refunds due to customers of approximately $1,617,000 due to chargebacks from one major customer for damaged goods (See Note 2 – LIQUIDITY). These activities accounted for approximately 89% of cash used in operations.

Net cash used in operating activities was approximately $5,400,000 for the six months ended September 30, 2018. During the six months ended September 30, 2018 the Company experienced an increase in inventory of approximately $4,276,000 primarily due to inventory requirements for the upcoming holiday season. Accounts receivable also increased by approximately $19,152,000 due primarily to seasonal increases in customer shipments during the second quarter ended September 30, 2018. These uses of operating cash were offset by operating activities that provided cash including an increase in accounts payable (primarily inventory vendors) of approximately $17,040,000 and a seasonal increase in accrued expenses of approximately $831,000 which were both commensurate with the increase in seasonal sales. These activities accounted for approximately 98% of the cash used in operations with the remaining 2% due to seasonal changes in other operating assets and liabilities.

Net cash used in investing activities for the six months ended September 30, 2019 was approximately $213,000 as compared to approximately $289,000 used in investing activities for the same period ended a year ago and consisted primarily of purchases of molds and tooling for new products.

Net cash provided by financing activities for the six months ended September 30, 2019 was approximately $4,472,000 compared to cash provided by financing activities of approximately $6,629,000 for the same period ended of the prior year. We borrowed approximately $4,429,000 from our Revolving Credit Facility for working capital and received approximately $176,000 from a financing arrangement with Dimension Funding to finance implementation of a new Enterprise Resource Planning system. These increases in cash provided by financing activities were offset by payments of finance leases and the bank term note of approximately $132,000.

As of September 30, 2019, we continued to borrow from our Revolving Credit Facility, which provides for a maximum loan amount of $15,000,000 during peak selling season (with the ability of the Company to request an additional $5,000,000 of availability during peak selling season if required) and reduces to $7,500,000 during the off-peak season. We believe this credit facility will be adequate to maintain and grow our business during the three-year term of the agreement. If we are unable to comply with the financial covenants defined in the financing agreement and default on the credit facility, it may have a material adverse effect on our ability to meet our financial obligations. The Revolving Credit Facility expires in July 2020. Management plans to either extend the current Revolving Credit Facility or negotiate a new credit facility on or before the expiration of the current agreement.

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As of September 30, 2019 the Company was in default on the Revolving Credit Facility due to non-compliance with the fixed charge coverage ratio in part due to the loss of margin and related expenses associated with the damaged goods received by one major customer in August, 2019. In November 2019, the Company entered into a Forbearance Agreement with PNC Bank National Association (“PNC”) whereby PNC “forbears” taking action it would be entitled to under a default through March 31, 2020 at which time we would renegotiate renewal of the Revolving Credit Facility or obtain alternative financing. The Forebearance Agreement requires, among other matters, the Company to comply with certain conditions and covenants including the following:

● PNC will implement a $1,000,000 loan availability block.

● PNC will require an EBITDA hurdles of greater than or equal to $400,000 for the third quarter ending December 31, 2019, of $0 for the six months ending March 31, 2020 and $(83,000) for the twelve months ending March 31, 2020.

● PNC will charge a loan pricing increase of .5% until March 31, 2020 which would continue until the Company achieves compliance with the original fixed charge coverage ratio test of 1.1:1

Despite the loan additional availability block and EBITDA hurdles required for the third quarter ending December 31, 2019 and the fourth quarter ending March 31, 2020, management remains confident that there is still adequate availability on the Revolving Credit Facility and that ultimately the collection of the insurance claim will satisfy these hurdles and the Company expects to cure these defects prior to the expiration of the current Revolving Credit Facility on July 15, 2020. While management intends to negotiate renewal of the Revolving Credit Facility prior to expiration and is exploring alternate sources of financing, there can be no assurance that these efforts will be successful or that any new terms will be as favorable. If the Company is unable to comply with the conditions of the Forbearance Agreement and eventually comply with the original fixed charge coverage ratio test of 1.1 : 1 it may have a material adverse effect on our ability to meet our financial obligations.

As explained in Note 2 – LIQUIDITY, we have filed insurance claims with our cargo insurance carrier to recover the sales value and expenses associated with damaged goods received by a major customer in August 2019. Due to the significant extent of the damage more time will be required to determine the final claim settlement. While our insurance policy does provide for recovery of the sales value plus additional expenses associated with the damaged goods, if we are unable to collect all or a significant portion of the insurance claim, it may have a material adverse effect on our ability to meet our financial obligations.

INVENTORY SELL THROUGH

We monitor the inventory levels and sell through activity of our major customers to properly anticipate defective returns and maintain the appropriate level of inventory. We believe that our warranty provision reflects the proper amount of reserves to cover potential defective sales returns based on historical return ratios and information available from the customers.

SEASONAL AND QUARTERLY RESULTS

Historically, our operations have been seasonal, with the highest net sales occurring in our second and third fiscal quarters (reflecting increased orders for systems and music merchandise during the Christmas holiday season) and to a lesser extent the first and fourth quarters of the fiscal year. Sales in our second and third fiscal quarters, combined, accounted for approximately 94% and 89% of net sales in fiscal 2019 and 2018, respectively.

Our results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis.

INFLATION

Inflation has not had a significant impact on our operations. We generally have adjusted our prices to track changes in the Consumer Price Index since prices we charge are generally not fixed by long-term contracts.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

CRITICAL ACCOUNTING POLICIES

The Company’s interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgement increases such judgements become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions have not materially changed from those identified in the Company’s 2019 Annual Report.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for small reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls. There was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Not applicable for smaller reporting companies

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

See Note 6 – BANK FINANCING in the notes to the condensed consolidated financial statements.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

31.1 Certification of Gary Atkinson, Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*

31.2 Certification of Lionel Marquis, Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*

32.1 Certifying Statement of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.*

32.2 Certifying Statement of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.*

* Filed herewith

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SIGNATURES

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

	THE SINGING MACHINE COMPANY, INC.
Date: November 19, 2019	By:	/s/ Gary Atkinson
		Gary Atkinson
		Chief Executive Officer
		/s/ Lionel Marquis
		Lionel Marquis
		Chief Financial Officer

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EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Gary Atkinson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Singing Machine Company, Inc. for the period ended September 30, 2019;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Gary Atkinson

Gary Atkinson

Chief Executive Officer

(Principal Executive Officer)

Date: November 19, 2019

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Lionel Marquis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Singing Machine Company, Inc. for the period ended September 30, 2019;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Lionel Marquis

Lionel Marquis

Chief Financial Officer

(Principal Accounting and Financial Officer)

Date: November 19, 2019

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Singing Machine Company, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gary Atkinson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to The Singing Machine Company, Inc. and will be retained by The Singing Machine Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

/S/ Gary Atkinson

Gary Atkinson

Chief Executive Officer

(Principal Executive Officer)

Date: November 19, 2019

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Singing Machine Company, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lionel Marquis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to The Singing Machine Company, Inc. and will be retained by The Singing Machine Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

/S/ Lionel Marquis

Lionel Marquis

Chief Financial Officer

(Principal Accounting and Financial Officer)

Date: November 19, 2019

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Employee Benefit Plans (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Retirement Benefits [Abstract]
Defined contribution plan, administrative expenses	$ 18,000	$ 17,000	$ 32,000	$ 33,000

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Bank Financing

6 Months Ended

Sep. 30, 2019

Debt Disclosure [Abstract]

Bank Financing

NOTE 6 – BANK FINANCING

Revolving Credit Facility

On June 22, 2017, the Company renewed the existing revolving credit facility (the “Revolving Credit Facility”) with PNC for an additional three years expiring on July 15, 2020. The outstanding loan balance cannot exceed $15,000,000 during peak selling season between August 1 and December 31 (with the ability of the Company to request an additional $5,000,000 of availability during peak selling season if required) and is reduced to a maximum of $7,500,000 between January 1 and July 31. At September 30, 2019 and March 31, 2019, the outstanding balance was approximately $4,400,000 and $0, respectively, on the Revolving Credit Facility. As of September 30, 2019, there was approximately $10,600,000 available to borrow on the Revolving Credit Facility. Usage under the Revolving Credit Facility shall not exceed the sum of the following (the “Borrowing Base”):

● Up to 85% of the company’s eligible domestic and Canadian accounts receivable and up to 90% of eligible foreign credit insured accounts aged less than 60 days past due (not to exceed 90 days from invoice date, cross aged on the basis of 50% or more past due with certain specific accounts qualifying for up to 120 days from invoice date not to exceed 30 days from the due date; plus

● Up to the lesser of (a) 60% of the cost of eligible inventory or (b) 85% of net orderly liquidation value percentage of eligible inventory (annual inventory appraisals required); minus

● Applicable reserves including a dilution reserve equal to 100% of the Company’s advertising and return accrual reserves. Dilution reserve not to exceed availability generated from eligible accounts receivable.

The Revolving Credit Facility includes the following sub-limits:

● Letters of Credit to be issued limited to $3,000,000.

● Inventory availability limited to $5,000,000.

● $500,000 eligible in-transit inventory sublimit within the $5,000,000 total inventory.

● Mandatory pay-down to $1,000,000 (excluding letters of credit) for any 30 consecutive days between February 1 and April 30.

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

● Fixed charge coverage ratio test of 1.1:1 times measured on a rolling four quarter basis, defined as EBITDA less non-financed capital expenditures, cash dividends and distributions paid and cash taxes paid divided by the sum of interest and principal on all indebtedness.

● Capital expenditures limited to $375,000 per year

As of September 30, 2019 the Company was in default on the Revolving Credit Facility due to non-compliance with the fixed charge coverage ratio in part due to the loss of margin and related expenses associated with the damaged goods received by one major customer in August, 2019. In November 2019, the Company entered into a Forbearance Agreement with PNC whereby PNC “forbears” taking action it would be entitled to under a default through March 31, 2020 and would continue forbearance actions provided the Company continued to meet compliance with certain conditions (See Note 2 – LIQUIDITY).

Absent the Forbearance Agreement interest on the Revolving Line of Credit is accrued at .75% per annum over PNC’s announced prime rate with an option for the Company to elect the 1, 2 or 3 month fully absorbed PNC LIBOR Rate plus 2.75% per annum with a default rate of 2% over the applicable rate. There is an unused facility fee equal to .375% per annum on the unused portion of the Revolving Credit Facility which will be calculated on the basis of a 360 day year for the actual number of days elapsed and will be payable quarterly in arrears. During the three months ended September 30, 2019 and 2018 the Company incurred interest expense of approximately $32,000 and $50,000, respectively, on amounts borrowed against the Revolving Credit Facility. During the six months ended September 30, 2019 and 2018, the Company incurred interest expense of approximately $33,000 and $55,000, respectively on amounts borrowed against the Revolving Credit Facility. During the three months ended September 30, 2019 and 2018, the Company incurred an unused facility fee of approximately $14,000 and $8,000, respectively on the unused portion of the Revolving Credit Facility. During the six months ended September 30, 2019 and 2018, the Company incurred an unused facility fee of approximately $20,000 and $15,000, respectively on the unused portion of the Revolving Credit Facility.

The Revolving Line of Credit is secured by first priority security interests in all of the named borrowers’ tangible and intangible assets as well as first priority security interests of 100% of member or ownership interests of any of its domestic existing or newly formed subsidiaries and first priority lien on up to 65% of the borrowers’ foreign subsidiary’s existing or subsequently formed or acquired foreign subsidiaries. The Revolving Credit Facility is also secured by a related-party debt subordination agreement with Starlight Marketing Development, Ltd. in the amount of approximately $803,000. Costs associated with renewal of the Revolving Credit Facility of approximately $40,000 were deferred and are being amortized over the term of the agreement. During the three months ended September 30, 2019 and 2018, the Company incurred amortization expense of approximately $3,000 associated with the amortization of deferred financing costs from the original Revolving Credit Facility. During the six months ended September 30, 2019 and 2018 the Company incurred amortization expense of approximately $7,000 associated with the amortization of deferred financing costs from the original Revolving Credit Facility.

Subordinated Related Party Debt

The subordination agreement was amended reducing the amount of related party subordinated debt to the remaining amount due of approximately $815,000. Provision has also been made to allow repayment of the remaining $815,000 in quarterly installments of $123,000 including interest accrued at 6% per annum commencing September 30, 2017 and ending on the debt maturity date of June 30, 2019. There are no provisions to continue accruing interest on the outstanding principal amount due as of June 30, 2019. Payments of $123,000 are only permitted upon receipt of the Company’s quarterly compliance certificate; the Company having met the mandatory pay-down of the Revolving Credit Facility to $1,000,000 and average excess availability for the prior 30 days (after subtraction of third party trade payables 30 days or more past due) of no less than $1,000,000 after giving effect to the payment. As part of the Conditions to Installment Payment of the subordinated debt, payments not made under this note that cannot be made as a result of the foregoing prohibition, including payments after the scheduled maturity date, shall not be deemed an Event of Default and can be made as soon as the Company is able to demonstrate that it meets the liquidity requirements defined above. Quarterly installment payments of $123,000 due on the last day of each fiscal quarter have not been made since September 2017 due to the Company not meeting these requirements; a payment of $123,000 which includes principal and interest, was made during the three and six months ended September 30, 2019. A payment of $25,000 was made in August 2019 with approximately $12,500 paying down the principal and approximately $12,500 paying interest due. During the three months ended September 30, 2019 and 2018, the Company incurred interest expense of approximately $0 and $7,000 respectively on the related party subordinated debt. During the six months ended September 30, 2019 and 2018, the Company incurred interest expense of approximately $2,000 and $16,000, respectively on the related party subordinated debt. As of September 30, 2019 and March 31, 2019, the remaining amount due on the subordinated related party debt was approximately $803,000 and $815,000, respectively

Bank Term Note

The Company repaid the final $125,000 installment of a term loan with PNC which originated in fiscal year 2018.

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Geographical Information

6 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Geographical Information

NOTE 10 - GEOGRAPHICAL INFORMATION

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

	FOR THE THREE MONTHS ENDED				FOR THE SIX MONTHS ENDED
	September 30,				September 30,
	2019		2018		2019		2018
North America	$	16,263,563	$	21,118,623	$	20,877,336	$	22,910,537
Europe		3,439,976		3,003,899		3,539,400		3,042,771
Australia		378,303		179,923		474,146		179,923
Others		-		2,500		-		8,225
	$	20,081,842	$	24,304,945	$	24,890,882	$	26,141,456

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

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Property and Equipment - Summary of Property and Equipment (Details) - USD ($)	6 Months Ended
	Sep. 30, 2019	Mar. 31, 2019
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 2,114,409	$ 1,915,241
Less: Accumulated depreciation	1,497,362	1,392,331
Property and equipment, net	$ 617,047	522,910
Computer and Office Equipment [Member]
Property, Plant and Equipment [Line Items]
Average useful life (in years)	5 years
Property and equipment, gross	$ 134,101	140,575
Furniture and Fixtures [Member]
Property, Plant and Equipment [Line Items]
Average useful life (in years)	7 years
Property and equipment, gross	$ 98,410	98,410
Warehouse Equipment [Member]
Property, Plant and Equipment [Line Items]
Average useful life (in years)	7 years
Property and equipment, gross	$ 195,401	209,419
Molds and Tooling [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 1,686,497	$ 1,466,837
Molds and Tooling [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Average useful life (in years)	3 years
Molds and Tooling [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Average useful life (in years)	5 years

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Summary of Accounting Policies (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2019	Mar. 31, 2018
Accounting Policies [Line Items]
Percentage of reserves for customers			100.00%
Foreign financial institutions actual deposits	$ 2,134,000		$ 2,134,000		$ 211,000
Future inventory returns	1,857,000		1,857,000		599,000
Inventory reserves	254,000		254,000		254,000
Reserve for sales returns	3,230,645	$ 1,466,627	3,230,645	$ 1,466,627	896,154	$ 726,000
Stock option expense	5,000	10,000	10,000	21,000
Advertising expense	1,419,000	1,280,000	1,780,000	1,549,000
Accrued cooperative advertising allowances	664,000		664,000		185,000
Research and development costs	18,000	21,000	$ 23,000	$ 37,000
Effective tax rate			18.00%	23.00%
Net deferred tax assets	813,000		$ 813,000		$ 758,000
Income Tax (provision) benefit	$ (184,140)	$ (378,745)	$ 54,591	$ (54,745)
Percentage of tax benefits recognized likelihood of being realized			greater than 50%
Total potential dilutive shares from common stock options			2,250,000	2,350,000
Minimum [Member]
Accounting Policies [Line Items]
Cooperative advertising allowance, percentage			1.00%
Maximum [Member]
Accounting Policies [Line Items]
Cooperative advertising allowance, percentage			13.00%

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Commitments and Contingencies - Schedule of Supplemental Information Related to Leases (Details) (Parenthetical)	Sep. 30, 2019 USD ($)
Commitments and Contingencies Disclosure [Abstract]
Finance leases Property and equipment accumulated depreciation	$ 8,809

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Geographical Information (Tables)

6 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Schedule of Revenue from External Customers and Long-Lived Assets, by Geographical Areas

Sales by geographic region for the periods presented are as follows:

	FOR THE THREE MONTHS ENDED				FOR THE SIX MONTHS ENDED
	September 30,				September 30,
	2019		2018		2019		2018
North America	$	16,263,563	$	21,118,623	$	20,877,336	$	22,910,537
Europe		3,439,976		3,003,899		3,539,400		3,042,771
Australia		378,303		179,923		474,146		179,923
Others		-		2,500		-		8,225
	$	20,081,842	$	24,304,945	$	24,890,882	$	26,141,456

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Employee Benefit Plans

6 Months Ended

Sep. 30, 2019

Retirement Benefits [Abstract]

Employee Benefit Plans

NOTE 14 - EMPLOYEE BENEFIT PLANS

The Company has a 401(k) plan for its employees to which the Company makes contributions at rates dependent on the level of each employee’s contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to operations for contributions to this plan and administrative costs during the three months ended September 30, 2019 and 2018 totaled approximately $18,000 and $17,000, respectively. The amounts charged to operations for contributions to this plan and administrative costs during the six months ended September 30, 2019 and 2018 totaled approximately $32,000 and $33,000, respectively. The amounts are included as a component of general and administrative expense in the accompanying condensed consolidated statements of operations. The Company does not provide any post-employment benefits to retirees.

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Inventories, Net (Tables)

6 Months Ended

Sep. 30, 2019

Inventory Disclosure [Abstract]

Schedule of Inventory

Inventories are comprised of the following components:

	September 30, 2019		March 31, 2019
Finished Goods	$	10,948,842	$	5,679,245
Inventory in Transit		2,736,639		-
Estimated Amount of Future Returns		1,857,244		599,066
Subtotal		15,542,725		6,278,311
Less:Inventory Reserve		254,000		254,000
Inventories, net	$	15,288,725	$	6,024,311

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Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)	Sep. 30, 2019	Mar. 31, 2019
Allowance for doubtful accounts receivable, net	$ 331,195	$ 51,096
Preferred stock, par value	$ 1.00	$ 1.00
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common Class A [Member]
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	100,000	100,000
Common stock, shares issued
Common stock, shares outstanding
Common Class B [Member]
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	38,557,643	38,464,753
Common stock, shares outstanding	38,557,643	38,464,753

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Common Stock Issuances (Details Narrative) - USD ($)		3 Months Ended		6 Months Ended
	Jun. 12, 2019	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019
Number of shares issued, value			$ 12,500	$ 12,500
Board of Directors [Member]
Number of shares issued	32,890
Shares issued price per share	$ 0.38
Number of shares issued, value		$ 0		$ 12,500

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Basis of Presentation

6 Months Ended

Sep. 30, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

NOTE 1 – BASIS OF PRESENTATION

OVERVIEW

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

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Commitments and Contingencies - Schedule of Future Minimum Rental Payments for Operating and Finance Leases (Details)	Sep. 30, 2019 USD ($)
Commitments and Contingencies Disclosure [Abstract]
2020, for the remaining 6 months	$ 326,374
2021	348,562
2022	115,814
2023	117,638
2024	121,167
Total Minimum Future Payments	1,029,555
Less: Imputed Interest	85,149
Present Value of Lease Liabilities	944,406
2020, for the remaining 6 months	7,673
2021	15,347
2022	2,558
2023
2024
Total Minimum Future Payments	25,578
Less: Imputed Interest	801
Present Value of Lease Liabilities	$ 24,777

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Refunds Due to Customers (Details Narrative) - USD ($)	Aug. 30, 2019	Sep. 30, 2019	Mar. 31, 2019
Refund due to customer		$ 1,648,773	$ 31,075
One Major Customer [Member]
Damaged goods	$ 1,643,000
Refund due to customer		$ 1,643,000

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Concentrations of Credit and Sales Risk

6 Months Ended

Sep. 30, 2019

Risks and Uncertainties [Abstract]

Concentrations of Credit and Sales Risk

NOTE 15 - CONCENTRATIONS OF CREDIT AND SALES RISK

The Company derives a majority of its revenues from retailers of products in the United States. The Company’s allowance for doubtful accounts is based upon management’s estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers. At September 30, 2019, 84% of accounts receivable were due from three customers in North America that individually owed over 10% of total accounts receivable. At March 31, 2019, 62% of accounts receivable were due from three customers in North America that individually owed over 10% of total accounts receivable.

The Company generates most of its revenue from retailers of products in the United States with a significant amount of sales concentrated with several large customers the loss of which could have an adverse impact on the financial position of the Company. For the three months ended September 30, 2019, there were three customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 36%, 13%, and 11% respectively. For the three months ended September 30, 2018, there were three customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 29%, 11% and 11%, respectively.

For the six months ended September 30, 2019, there were two customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from this customer as a percentage of net sales were 43% and 10%, respectively . For the six months ended September 30, 2018, there were three customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 28%, 11% and 11%, respectively.

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Property and Equipment (Tables)

6 Months Ended

Sep. 30, 2019

Property, Plant and Equipment [Abstract]

Summary of Property and Equipment

A summary of property and equipment is as follows:

	USEFUL		September 30,		March 31,
	LIFE		2019		2019
Computer and office equipment		5 years	$	134,101	$	140,575
Furniture and fixtures		7 years		98,410		98,410
Warehouse equipment		7 years		195,401		209,419
Molds and tooling		3-5 years		1,686,497		1,466,837
				2,114,409		1,915,241
Less: Accumulated depreciation				1,497,362		1,392,331
			$	617,047	$	522,910

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Reserve for Sales Returns (Tables)

6 Months Ended

Sep. 30, 2019

Reserve For Sales Returns

Schedule of Reserve for Sales Returns

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

	Six Months Ended
	September 30,			September 30,
	2019			2018
Reserve for sales returns at beginning of the period	$	896,154		$	726,000
Provision for estimated sales returns		3,543,813			1,883,366
Sales returns received		(1,209,322	)		(1,142,739	)
Reserve for sales returns at end of the period	$	3,230,645		$	1,466,627

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Reserve for Sales Returns - Schedule of Reserve for Sales Returns (Details) - USD ($)	6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Reserve For Sales Returns
Reserve for sales returns at beginning of the period	$ 896,154	$ 726,000
Provision for estimated sales returns	3,543,813	1,883,366
Sales returns received	(1,209,322)	(1,142,739)
Reserve for sales returns at end of the period	$ 3,230,645	$ 1,466,627

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Condensed Consolidated Balance Sheets - USD ($)	Sep. 30, 2019	Mar. 31, 2019
Current Assets
Cash	$ 2,254,572	$ 211,408
Accounts receivable, net of allowances of $331,195 and $51,096, respectively	16,249,229	1,769,404
Due from PNC Bank		2,236,779
Insurance claim receivable	1,247,981
Inventories, net	15,288,725	6,024,311
Prepaid expenses and other current assets	257,611	274,278
Deferred financing costs	10,000	13,333
Total Current Assets	36,510,779	10,818,454
Property and equipment, net	617,047	522,910
Deferred financing costs, net of current portion		3,333
Deferred tax assets	812,957	758,366
Operating Leases - right of use assets	845,703
Other non-current assets	194,741	90,082
Total Assets	38,981,227	12,193,145
Current Liabilities
Accounts payable	17,457,261	842,708
Accrued expenses	1,651,888	950,773
Current portion of bank term note payable		125,000
Revolving line of credit	4,428,588
Customer deposits	66,923
Refunds due to customers	1,648,773	31,075
Reserve for sales returns	3,230,645	896,154
Current portion of finance leases	14,681	14,414
Current portion of installment note	30,065
Current portion of operating lease liabilities	567,340
Total Current Liabilities	30,158,590	3,675,491
Finance leases, net of current portion	10,096	17,499
Installment note, net of current portion	145,775
Operating lease liabilities, net of current portion	377,066
Total Liabilities	30,691,527	3,692,990
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued and outstanding
Additional paid-in capital	19,719,038	19,687,263
Subscriptions receivable		(2,200)
Accumulated deficit	(11,814,915)	(11,569,556)
Total Shareholders' Equity	8,289,700	8,500,155
Total Liabilities and Shareholders' Equity	38,981,227	12,193,145
Common Class A [Member]
Shareholders' Equity
Common stock
Common Class B [Member]
Shareholders' Equity
Common stock	385,577	384,648
Cosmo Communications Canada, Inc [Member]
Current Assets
Accounts receivable related party	57,465
Winglight Pacific Ltd [Member]
Current Assets
Accounts receivable related party	1,145,196	288,941
Starlight Consumer Elecronics Co.Ltd. [Member]
Current Liabilities
Due to related party	12,040
Starlight Electronics Co., Ltd [Member]
Current Liabilities
Due to related party	191,100
Starlight R & D [Member]
Current Liabilities
Due to related party	56,627
Starlight Marketing Development Ltd [Member]
Current Liabilities
Current portion of subordinated related party debt - Starlight Marketing Development, Ltd.	$ 802,659	$ 815,367

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Stock Options - Schedule of Employee Stock Options Outstanding (Details)	6 Months Ended
	Sep. 30, 2019 $ / shares shares
Stock Options Number Outstanding | shares	2,250,000	[1]
Stock Option Number Exercisable | shares	2,150,000	[1]
Exercise Price Range One [Member]
Stock Options Outstanding Exercise Price, Lower Range Limit	$ .03
Stock Options Outstanding Exercise Price, Upper Range Limit	$ .32
Stock Options Number Outstanding | shares	1,570,000
Stock Option Outstanding Weighted Average Remaining Contractual Life	3 years 8 months 12 days
Stock Option Outstanding Weighted Average Exercise Price	$ 0.16
Stock Option Number Exercisable | shares	1,570,000
Stock Option Exercisable Weighted Average Exercise Price	$ 0.16
Exercise Price Range Two [Member]
Stock Options Outstanding Exercise Price, Lower Range Limit	.38
Stock Options Outstanding Exercise Price, Upper Range Limit	$ .55
Stock Options Number Outstanding | shares	680,000
Stock Option Outstanding Weighted Average Remaining Contractual Life	8 years 3 months 19 days
Stock Option Outstanding Weighted Average Exercise Price	$ 0.42
Stock Option Number Exercisable | shares	580,000
Stock Option Exercisable Weighted Average Exercise Price	$ 0.50

[1] Total number of options outstanding as of September 30, 2019 includes 500,000 options issued to five current and two former directors as compensation and 1,150,000 options issue to key employees that were not issued from the Plan.

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Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - USD ($)	Preferred Stock [Member]	Common Stock [Member]	Additional Paid in Capital [Member]	Subscriptions Receivable [Member]	Accumulated Deficit [Member]	Total
Balance at Mar. 31, 2018		$ 382,820	$ 19,624,063		$ (12,201,103)	$ 7,805,780
Balance, shares at Mar. 31, 2018		38,282,028
Net Income					183,278	183,278
Employee compensation-stock option			20,830			20,830
Exercise of stock options		$ 800	5,600			6,400
Exercise of stock options, shares		80,000
Director fees		$ 227	12,273			12,500
Director fees, shares		22,725
Balance at Sep. 30, 2018		$ 383,847	19,662,766		(12,017,825)	8,028,788
Balance, shares at Sep. 30, 2018		38,384,753
Balance at Jun. 30, 2018		$ 382,820	19,635,341		(13,235,254)	6,782,907
Balance, shares at Jun. 30, 2018		38,282,028
Net Income					1,217,429	1,217,429
Employee compensation-stock option			9,552			9,552
Exercise of stock options		$ 800	5,600			6,400
Exercise of stock options, shares		80,000
Issuance of common stock - directors		$ 227	12,273			12,500
Issuance of common stock - directors, shares		22,725
Balance at Sep. 30, 2018		$ 383,847	19,662,766		(12,017,825)	8,028,788
Balance, shares at Sep. 30, 2018		38,384,753
Balance at Mar. 31, 2019		$ 384,648	19,687,263	(2,200)	(11,569,556)	8,500,155
Balance, shares at Mar. 31, 2019		38,464,753
Net Income					(245,359)	(245,359)
Employee compensation-stock option			10,004			10,004
Collection of subscription receivable				2,200		2,200
Exercise of stock options		$ 600	9,600			10,200
Exercise of stock options, shares		60,000
Issuance of common stock - directors		$ 329	12,171			12,500
Issuance of common stock - directors, shares		32,890
Balance at Sep. 30, 2019		$ 385,577	19,719,038		(11,814,915)	8,289,700
Balance, shares at Sep. 30, 2019		38,557,643
Balance at Jun. 30, 2019		$ 384,977	19,704,436		(12,439,137)	7,650,276
Balance, shares at Jun. 30, 2019		38,497,643
Net Income					624,222	624,222
Employee compensation-stock option			5,002			5,002
Exercise of stock options		$ 600	9,600			10,200
Exercise of stock options, shares		60,000
Balance at Sep. 30, 2019		$ 385,577	$ 19,719,038		$ (11,814,915)	$ 8,289,700
Balance, shares at Sep. 30, 2019		38,557,643

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Commitments and Contingencies - Schedule of Lease term and Discount Rate (Details)	Sep. 30, 2019
Commitments and Contingencies Disclosure [Abstract]
Weighted average remaining lease term (months), Operating leases	31 years 8 months 12 days
Weighted average remaining lease term (months), Finance leases	20 years
Weighted average discount rate, Operating leases	6.25%
Weighted average discount rate, Finance leases	3.68%

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Concentrations of Credit and Sales Risk (Details Narrative)	3 Months Ended		6 Months Ended		12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2019
Accounts Receivable [Member] | Three Customers [Member]
Concentration of sales risk, percentage					10.00%
Accounts Receivable [Member] | Three Customers [Member] | North America [Member]
Concentration of sales risk, percentage			84.00%		62.00%
Sales Revenue [Member] | Three Customers [Member]
Concentration of sales risk, percentage		11.00%
Sales Revenue [Member] | Two Customers [Member]
Concentration of sales risk, percentage			10.00%
Sales Revenue [Member] | Customer One [Member]
Concentration of sales risk, percentage	36.00%	29.00%	43.00%	28.00%
Sales Revenue [Member] | Customer Two [Member]
Concentration of sales risk, percentage	13.00%	11.00%	10.00%	11.00%
Sales Revenue [Member] | Customer Three [Member]
Concentration of sales risk, percentage		11.00%		11.00%

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Commitments and Contingencies

6 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

NOTE 7 - COMMITMENTS AND CONTINGENCIES

LEASES

Operating Leases

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

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

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

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

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

Finance Leases

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

Supplemental balance sheet information related to leases as of September 30, 2019 is as follows:
Assets:
Operating lease - right-of-use assets	$	845,703
Finance leases as a component of Property and equipment, net of accumulated depreciation of $8,809		34,717
Liabilities
Current
Current portion of operating leases	$	567,340
Current portion of finance leases		14,681
Noncurrent
Operating lease liabilities, net of current portion	$	377,066
Finance leases, net of current portion		10,096

Supplemental statement of operations information related to leases for the three and six months ended September 30, 2019 is as follows:
	Three Months Ended		Six Months Ended
	September 30 2019		September 30 2019
Operating lease expense as a component of general and administrative expenses	$	148,724	$	297,448
Finance lease cost
Depreciation of leased assets as a component of depreciation	$	1,555	$	3,110
Interest on lease liabilities as a component of interest expense	$	250	$	533

Supplemental cash flow information related to leases for the six months ended September 30, 2019 is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow paid for operating leases			$	324,783
Financing cash flow paid for finance leases			$	7,136
Lease term and Discount Rate
Weighted average remaining lease term (months)	31.7
Operating leases	20.0
Finance leases
Weighted average discount rate
Operating leases	6.25	%
Finance leases	3.68	%

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

Year	Operating Leases		Finance Leases
2020, for the remaining 6 months	$	326,374	$	7,673
2021		348,562	$	15,347
2022		115,814		2,558
2023		117,638		-
2024		121,167		-
Total Minimum Future Payments		1,029,555		25,578
Less: Imputed Interest		85,149		801
Present Value of Lease Liabilities	$	944,406	$	24,777

Installment Note

On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance a new Enterprise Resource Planning (“ERP”) System project over a term of 60 months at a cost of approximately $375,000. Dimension has a 100% security interest in the licensed software being financed. We estimate the system to be placed in service on April 1, 2020. Upon approval by Company management, Dimension will release progress payments directly to the project consultants as specific project milestones are met. Total progress payments will be made to the vendor over a period of approximately nine months and the Company will be charged financing costs on the amounts preapproved for the project. Payments advanced by Dimension to the project consultant during the three and six months ended September 30, 2019 totaled approximately $176,000. This amount was converted to an installment note which calls for estimated monthly installment payments of approximately $3,530 (including principal and interest) over a 60 month period and bears interest of approximately 7.58%. The initial installment payment was due on October 1, 2019. Total financing charges on the financing arrangement was approximately $7,000 for the three and six months ended September 30, 2019.

LEGAL MATTERS

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

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Related Party Transactions

6 Months Ended

Sep. 30, 2019

Related Party Transactions [Abstract]

Related Party Transactions

NOTE 11 –RELATED PARTY TRANSACTIONS

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

DUE TO/FROM RELATED PARTIES

On September 30, 2019 and March 31, 2019, in the aggregate the Company had approximately $1,203,000 and $289,000, respectively, due from related parties for goods and services sold to these companies.

On September 30, 2019 and March 31, 2019, the Company had amounts due to related parties in the amounts of approximately $260,000 and $0 for engineering fees, storage and administrative services provided to the Company by these related parties.

Subordinated Related Party Debt

In connection with the Revolving Credit Facility the Company was required to subordinate related party debt to Starlight Marketing Development, Ltd. (“subordinated debt”). The subordinated debt of approximately $924,000 bears interest at 6% and is scheduled to be paid in quarterly installments of $123,000 which include interest and commenced September 30, 2017 and ending on the debt maturity date of June 30, 2019. There are no provisions to continue accruing interest on the outstanding amount due as of June 30, 2019. The remaining amount due on the subordinated debt of approximately $803,000 and $815,000 were classified as a current liability as of September 30, 2019 and March 31, 2019, respectively on the condensed consolidated balance sheets. Quarterly installment payments of $123,000 due on the last day of each fiscal quarter have not been made since September 2017; however a payment of $25,000 which includes principal and interest, was made during the three and six months ended September 30, 2019. During the three months ended September 30, 2019 and 2018 the Company incurred interest expense of approximately $0 and $7,000 respectively on the related party subordinated debt. During the six months ended September 30, 2019 and 2018 the Company incurred interest expense of approximately $2,000 and $16,000, respectively on the related party subordinated debt.

TRADE

During the three months ended September 30, 2019 and 2018 the Company sold approximately $778,000 and $1,150,000, respectively to Winglight Pacific, Ltd. (“Winglight”), a related party, at a discounted price similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for the three months ended September 30, 2019 and 2018 was 23.9% and 30.1%, respectively. The product was shipped to Cosmo Communications of Canada (“Cosmo”), another related company and the Company’s primary distributor of its products to Canada. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations.

During the three months ended September 30, 2019 and 2018 the Company sold approximately $168,000 and $593,000, respectively of product directly to Cosmo from its California warehouse facility. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations.

During the six months ended September 30, 2019 and 2018 the Company sold approximately $852,000 and $1,150,000, respectively to Winglight at a discounted price similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for the six months ended September 30, 2019 and 2018 was 23.7% and 30.1%, respectively. The product was shipped to Cosmo. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations.

During the six months ended September 30, 2019 and 2018 the Company sold approximately $239,000 and $638,000, respectively of product directly to Cosmo from its California warehouse facility. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations.

The Company incurred service expenses from Starlight Electronics Co, Ltd, (“SLE”) a related party. The services from SLE for the three months ended September 30, 2019 and 2018 were approximately $90,000, and $85,000 respectively. The services from SLE for the six months ended September 30, 2019 and 2018 were approximately $191,000 and $181,000 respectively. These amounts were included as a component of general and administrative expenses in the accompanying condensed consolidated statements of operations.

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Commitments and Contingencies - Schedule of Supplemental Information Related to Leases (Details) - USD ($)	3 Months Ended	6 Months Ended
	Sep. 30, 2019	Sep. 30, 2019	Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]
Operating lease - Right-of-use assets	$ 845,703	$ 845,703
Finance leases as a component of Property and equipment, net of accumulated depreciation of $8,809	34,717	34,717
Current portion of operating leases	567,340	567,340
Current portion of finance leases	14,681	14,681	14,414
Operating lease liabilities, net of current portion	377,066	377,066
Finance leases, net of current portion	10,096	10,096	$ 17,499
Operating lease expense as a component of general and administrative expenses	148,724	297,448
Finance lease cost Depreciation of leased assets as a component of Depreciation	1,555	3,110
Finance lease cost Interest on lease liabilities as a component of Interest Expense	250	533
Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow paid for operating leases		324,783
Cash paid for amounts included in the measurement of lease liabilities: Financing cash flow paid for finance leases		$ 7,136

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Property and Equipment (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Property, Plant and Equipment [Abstract]
Depreciation expense	$ 60,000	$ 68,000	$ 119,049	$ 135,781

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Liquidity (Details Narrative) - USD ($)			3 Months Ended		6 Months Ended
	Nov. 14, 2019	Nov. 14, 2019	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2019
Net sales			$ 20,081,842	$ 24,304,945	$ 24,890,882	$ 26,141,456
Freight cost			109,000		109,000
Additional related expenses			219,000		219,000
Refund due to customer			1,648,773		1,648,773		$ 31,075
Insurance claim receivable			$ 1,247,981		$ 1,247,981
Revolving credit facility expiration date					Jul. 15, 2020
Line of credit description					PNC will charge a loan pricing increase of .5% until March 31, 2020 which would continue until the Company achieves compliance with the original fixed charge coverage ratio test of 1.1:1
Line of credit, maturity date					Jul. 15, 2020
Subsequent Event [Member]
Damaged goods	$ 1,643,000
Net sales	1,534,000
Forebearance Agreement [Member] | PNC Bank National Association [Member]
EBITDA, third quarter ending December 31, 2019					$ 400,000
EBITDA, six months ending March 31, 2020					0
EBITDA, twelve months ending March 31, 2020					$ (83,000)
Forebearance Agreement [Member] | PNC Bank National Association [Member] | Subsequent Event [Member]
Revolving credit facility expiration date		Mar. 31, 2020
Line of credit facility	$ 1,000,000	$ 1,000,000
Line of credit, maturity date		Mar. 31, 2020

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Summary of Accounting Policies (Tables)

6 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Schedule of Disaggregation of Revenue

Disaggregated revenue from these product lines for the three and six months ended September 30, 2019 and 2018 consisted of the following:

	Three Months Ended				Six Months Ended
Product Line		9/30/2019		9/30/2018		9/30/2019		9/30/2018
Classic Karaoke Machines	$	11,737,193	$	15,496,872	$	15,893,233	$	16,507,383
Download Karaoke Machines		4,005,488		5,792,683		4,146,488		6,003,683
SMC Kids Toys		418,716		1,466,087		558,716		1,593,087
Music and Accessories		3,920,445		1,549,303		4,292,445		2,037,303
Total Net Sales	$	20,081,842	$	24,304,945	$	24,890,882	$	26,141,456

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Stock Options (Tables)

6 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

Summary of Stock Option Activity

A summary of stock option activity for the six months ended September 30, 2019 is summarized below:

	September 30, 2019
	Number of Options			Weighted Average Exercise Price
Stock Options:
Balance at beginning of period		2,210,000		$	0.25
Granted		100,000		$	0.38
Exercised		(60,000	)	$	0.17
Balance at end of period		2,250,000		$	0.26
Options exercisable at end of period		2,150,000		$	0.25

Schedule of Employee Stock Options Outstanding

The following table summarizes information about employee stock options outstanding at September 30, 2019:

Range of Exercise Price	Number Outstanding at September 30, 2019		Weighted Average Remaining Contractural Life		Weighted Average Exercise Price		Number Exercisable at September 30, 2019		Weighted Average Exercise Price
$.03 - $.32		1,570,000		3.7		0.16		1,570,000		0.16
$.38 - $.55		680,000		8.3		0.42		580,000		0.50
*		2,250,000						2,150,000

* Total number of options outstanding as of September 30, 2019 includes 500,000 options issued to five current and two former directors as compensation and 1,150,000 options issue to key employees that were not issued from the Plan.

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Liquidity

6 Months Ended

Sep. 30, 2019

Liquidity

Liquidity

NOTE 2 - LIQUIDITY

In August 2019, we received notification from a major customer that several containers of goods from multiple vessels purchased direct import by the customer had arrived severely water damaged. Upon inspection of the damaged goods by insurance surveyors it was their opinion that the source of the damage was due to moisture in the pallets provided by the factory which caused significant condensation and consequently water damage to the merchandise. Actual damage to the goods occurred while the goods were in transit. We have filed insurance claims on our cargo insurance policy which does provide for recovery of the sales value plus additional expenses associated with the damaged goods. As of November 14, 2019, the customer charged us back a total of approximately $1,643,000 for damaged goods consisting of sales value of approximately $1,534,000 which was recorded as a reduction in net sales and approximately $109,000 in freight costs which were expensed as a component of selling expenses on the accompanying condensed consolidated statements of operations for the three and six months ended September 30, 2019. In addition, we have incurred additional related expenses of approximately $219,000 that were included as a component of general and administrative expenses on the accompanying condensed consolidated statements of operations for the three and six months ended September 30, 2019. We continue to gather the relevant information required to complete the insurance claims, however due to the significant extent of the damage more time will be required to determine the final claim settlement. As such, we have recorded a refund due to the customer of approximately $1,643,000 and recognized an insurance claim receivable of approximately $1,248,000 (the approximate cost of the damaged goods returned that will be destroyed) on the accompanying condensed consolidated balance sheet at September 30, 2019. The time of the collection of this insurance claim receivable is uncertain at this time.

As of September 30, 2019 the Company was in default on the Revolving Credit Facility due to non-compliance with the fixed charge coverage ratio in part due to the loss of margin and expenses associated with the damaged goods discussed above. In November 2019, the Company entered into a Forbearance Agreement with PNC Bank National Association (“PNC”) whereby PNC “forbears” taking action it would be entitled to under a default through March 31, 2020 at which time we would renegotiate renewal of the Revolving Credit Facility or obtain alternative financing. The Forebearance Agreement requires, among other matters, the Company to comply with certain conditions and covenants including the following:

● PNC will implement a $1,000,000 loan availability block.

● PNC will require an EBITDA hurdles of greater than or equal to $400,000 for the third quarter ending December 31, 2019, of $0 for the six months ending March 31, 2020 and $(83,000) for the twelve months ending March 31, 2020.

● PNC will charge a loan pricing increase of .5% until March 31, 2020 which would continue until the Company achieves compliance with the original fixed charge coverage ratio test of 1.1:1

Despite the loan additional availability block and EBITDA hurdles summarized above, management remains confident that there is still adequate availability on the Revolving Credit Facility and that ultimately the collection of the insurance claim will satisfy these hurdles and the Company expects to cure these defaults prior to the expiration of the current Revolving Credit Facility on July 15, 2020. While management intends to negotiate renewal of the Revolving Credit Facility prior to expiration and is exploring alternate sources of financing, there can be no assurance that these efforts will be successful or that any new terms will be as favorable.

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Geographical Information - Schedule of Revenue from External Customers and Long-Lived Assets, by Geographical Areas (Details) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Segment Reporting Information [Line Items]
Net Sales	$ 20,081,842	$ 24,304,945	$ 24,890,882	$ 26,141,456
North America [Member]
Segment Reporting Information [Line Items]
Net Sales	16,263,563	21,118,623	20,877,336	22,910,537
Europe [Member]
Segment Reporting Information [Line Items]
Net Sales	3,439,976	3,003,899	3,539,400	3,042,771
Australia [Member]
Segment Reporting Information [Line Items]
Net Sales	378,303	179,923	474,146	179,923
Others [Member]
Segment Reporting Information [Line Items]
Net Sales		$ 2,500		$ 8,225

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Stock Options (Details Narrative)	6 Months Ended
	Sep. 30, 2019 USD ($) $ / shares shares
Number of stock options shares issued	100,000
Stock options exercise price per share | $ / shares	$ .38
Expected dividend yield	0.00%
Risk-free interest rate	2.08%
Volatility	112.30%
Expected term	3 years
Unrecognized expense | $	$ 10,000
Unreognized expense, options vesting period	6 months
Intrinsic value of vested options | $	$ 134,000
Five Current and Two Former Directors [Member]
Stock options outstanding	500,000
Employees [Member]
Stock options outstanding	1,150,000

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Condensed Consolidated Statements of Operations (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Income Statement [Abstract]
Net Sales	$ 20,081,842	$ 24,304,945	$ 24,890,882	$ 26,141,456
Cost of Goods Sold	14,439,522	19,098,263	18,260,856	20,543,291
Gross Profit	5,642,320	5,206,682	6,630,026	5,598,165
Operating Expenses
Selling expenses	2,488,129	2,014,664	3,147,422	2,461,364
General and administrative expenses	2,235,269	1,452,125	3,606,325	2,660,769
Depreciation	59,588	68,210	119,049	135,781
Total Operating Expenses	4,782,986	3,534,999	6,872,796	5,257,914
Income (Loss) from Operations	859,334	1,671,683	(242,770)	340,251
Other Expenses
Interest expense	(47,639)	(72,176)	(50,514)	(95,561)
Finance costs	(3,333)	(3,333)	(6,666)	(6,667)
Total Other Expenses	(50,972)	(75,509)	(57,180)	(102,228)
Income (Loss) Before Income Tax (Provision) Benefit	808,362	1,596,174	(299,950)	238,023
Income Tax (Provision) Benefit	(184,140)	(378,745)	54,591	(54,745)
Net Income (Loss)	$ 624,222	$ 1,217,429	$ (245,359)	$ 183,278
Net Income (Loss) per Common Share
Basic	$ 0.02	$ 0.03	$ (0.01)	$ 0
Diluted	$ 0.02	$ 0.03	$ (0.01)	$ 0
Weighted Average Common and Common Equivalent Shares:
Basic	38,518,513	38,348,400	38,494,687	38,315,395
Diluted	39,343,383	39,530,880	38,494,687	39,497,875

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Bank Financing (Details Narrative) - USD ($)				3 Months Ended		6 Months Ended		12 Months Ended
	Nov. 30, 2019	Aug. 30, 2019	Jun. 22, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2018	Mar. 31, 2019
Line of Credit Facility [Line Items]
Line of credit facility, expiration date						Jul. 15, 2020
Revolving line of credit				$ 4,428,588		$ 4,428,588
Due from PNC Bank									2,236,779
Line of credit facility, description						PNC will charge a loan pricing increase of .5% until March 31, 2020 which would continue until the Company achieves compliance with the original fixed charge coverage ratio test of 1.1:1
First priority security ownership interest percentage				100.00%		100.00%
Line of credit facility, collateral amount				$ 803,000		$ 803,000
Amortization of deferred financing costs				3,333	$ 3,333	6,666	$ 6,667
Proceeds from lines of credit						4,428,588	6,877,610
Subordinated Debt [Member]
Line of Credit Facility [Line Items]
Line of credit facility, maximum amount outstanding during period						$ 815,000
Line of credit facility, interest rate during period						6.00%
Incurred interest expense		$ 12,500				$ 2,000
Repayments of lines of credit						815,000
Line of credit facility, periodic payment				123,000		123,000
Interest expense, related party				0	7,000		16,000
Payment of debt		25,000
Outstanding balance		$ 12,500		123,000		123,000
Line of credit, remaining borrowing capacity				$ 803,000		$ 803,000			$ 815,000
Maximum [Member]
Line of Credit Facility [Line Items]
First priority lien percentage				65.00%		65.00%
Prior 30 Days [Member] | Subordinated Debt [Member]
Line of Credit Facility [Line Items]
Line of credit facility, maximum amount outstanding during period						$ 1,000,000
Revolving Credit Facility [Member]
Line of Credit Facility [Line Items]
Debt instrument, term			3 years
Line of credit facility, expiration date			Jul. 15, 2020
Line of credit facility borrowing capacity				$ 10,600,000		$ 10,600,000
Line of credit facility, description						Usage under the Revolving Credit Facility shall not exceed the sum of the following (the "Borrowing Base"): Up to 85% of the company's eligible domestic and Canadian accounts receivable and up to 90% of eligible foreign credit insured accounts aged less than 60 days past due (not to exceed 90 days from invoice date, cross aged on the basis of 50% or more past due with certain specific accounts qualifying for up to 120 days from invoice date not to exceed 30 days from the due date; plus Up to the lesser of (a) 60% of the cost of eligible inventory or (b) 85% of net orderly liquidation value percentage of eligible inventory (annual inventory appraisals required); minus Applicable reserves including a dilution reserve equal to 100% of the Company's advertising and return accrual reserves. Dilution reserve not to exceed availability generated from eligible accounts receivable.
Line of credit facility sub limits description						The Revolving Credit Facility includes the following sub-limits: Letters of Credit to be issued limited to $3,000,000. Inventory availability limited to $5,000,000. $500,000 eligible in-transit inventory sublimit within the $5,000,000 total inventory. Mandatory pay-down to $1,000,000 (excluding letters of credit) for any 30 consecutive days between February 1 and April 30.
Line of credit facility, covenant terms						The Revolving Credit Facility must comply with the following quarterly financial covenants to avoid default: Fixed charge coverage ratio test of 1.1:1 times measured on a rolling four quarter basis, defined as EBITDA less non-financed capital expenditures, cash dividends and distributions paid and cash taxes paid divided by the sum of interest and principal on all indebtedness. Capital expenditures limited to $375,000 per year.
Line of credit facility, interest rate during period						0.75%
Line of credit facility, LIBOR Rate plus rate				2.75%		2.75%
Line of credit facility default rate						2.00%
Line of credit facility, unused capacity, commitment fee percentage						0.375%
Incurred interest expense				$ 32,000	50,000	$ 33,000	55,000
Incurred unused facility fee amount				14,000	8,000	20,000	15,000
Amortization of deferred financing costs				3,000	$ 3,000	7,000	$ 7,000
Cost associated with Revolving credit facility deferred						40,000
Revolving Credit Facility [Member] | Forebearance Agreement [Member]
Line of Credit Facility [Line Items]
Line of credit facility, description	In November 2019, the Company entered into a Forbearance Agreement with PNC whereby PNC "forbears" taking action it would be entitled to under a default through March 31, 2020 and would continue forbearance actions provided the Company continued to meet compliance with certain conditions
Revolving Credit Facility [Member] | Peak Selling Season Between August 1 and December 31 [Member]
Line of Credit Facility [Line Items]
Line of credit facility, maximum amount outstanding during period						15,000,000
Revolving line of credit				$ 5,000,000		5,000,000
Revolving Credit Facility [Member] | Peak Selling Season Between January 1 and July 31 [Member]
Line of Credit Facility [Line Items]
Line of credit facility, maximum amount outstanding during period						$ 7,500,000
PNC Bank National Association [Member] | Term Loan [Member]
Line of Credit Facility [Line Items]
Repayments of lines of credit								$ 125,000

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Summary of Accounting Policies - Schedule of Disaggregation of Revenue (Details) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Net Sales	$ 20,081,842	$ 24,304,945	$ 24,890,882	$ 26,141,456
Classic Karaoke Machines [Member]
Net Sales	11,737,193	15,496,872	15,893,233	16,507,383
Download Karaoke Machines [Member]
Net Sales	4,005,488	5,792,683	4,146,488	6,003,683
SMC Kids Toys [Member]
Net Sales	418,716	1,466,087	558,716	1,593,087
Music and Accessories [Member]
Net Sales	$ 3,920,445	$ 1,549,303	$ 4,292,445	$ 2,037,303

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Refunds Due to Customers

6 Months Ended

Sep. 30, 2019

Refunds Due To Customers

Refunds Due to Customers

NOTE 13 – REFUNDS DUE TO CUSTOMERS

As of September 30, 2019 and March 31, 2019 the amount of refunds due to customers was approximately $1,649,000 and $31,000, respectively. We have received total chargebacks of approximately $1,643,000 for damaged goods received by one major customer in August 2019 (See Note 2 – LIQUIDITY). As such, we have recorded a refund due to the customer of approximately $1,643,000 on the accompanying condensed consolidated balance sheet at September 30, 2019.

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Property and Equipment

6 Months Ended

Sep. 30, 2019

Property, Plant and Equipment [Abstract]

Property and Equipment

NOTE 5 – PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

	USEFUL		September 30,		March 31,
	LIFE		2019		2019
Computer and office equipment		5 years	$	134,101	$	140,575
Furniture and fixtures		7 years		98,410		98,410
Warehouse equipment		7 years		195,401		209,419
Molds and tooling		3-5 years		1,686,497		1,466,837
				2,114,409		1,915,241
Less: Accumulated depreciation				1,497,362		1,392,331
			$	617,047	$	522,910

Depreciation expense for the three months ended September 30, 2019 and 2018 was approximately $60,000 and $68,000, respectively. Depreciation expense for the six months ended September 30, 2019 and 2018 was approximately $119,000 and $136,000, respectively.

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Common Stock Issuances

6 Months Ended

Sep. 30, 2019

Equity [Abstract]

Common Stock Issuances

NOTE 9 – COMMON STOCK ISSUANCES

On June 12, 2019, the Company issued 32,890 shares of its common stock to its Board of Directors valued at $0.38 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2019. The Company recorded director compensation of $0 and $12,500 during the three and six months ended September 30, 2019.

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Commitments and Contingencies (Details Narrative)							3 Months Ended	6 Months Ended
	Jun. 18, 2019 USD ($)	Jun. 04, 2018 USD ($)	May 25, 2018 USD ($)	May 01, 2018 USD ($) ft²	Oct. 01, 2017 USD ($) ft²	Jun. 01, 2013 USD ($) ft²	Sep. 30, 2019 USD ($)	Sep. 30, 2019 USD ($)
Commitments And Contingencies [Line Items]
Monthly lease payments								$ 7,136
Dimension Funding, LLC [Member] | Project Consultant [Member]
Commitments And Contingencies [Line Items]
Advance financing payments							176,000	176,000
Operating Lease Agreement [Member]
Commitments And Contingencies [Line Items]
Operating lease space for office | ft²				424	6,500	86,000
Lease expiration date				Apr. 30, 2021	Mar. 31, 2024	Aug. 31, 2020
Rent expense				$ 1,600	$ 8,800	$ 43,700
Lease term						87 months
Lease extend term						The lease provides for a renewal option to extend the lease term for 5 years at the fair market value at the time of renewal.
Long-Term Capital Leasing Arrangements [Member] | Wells Fargo Equipment Finance [Member]
Commitments And Contingencies [Line Items]
Financing lease costs		$ 44,000	$ 44,000
Monthly lease payments		$ 1,279	$ 1,279
Financing lease term		36 months	36 months
Effective interest rate		4.50%	4.50%
Financing Arrangement [Member] | Dimension Funding, LLC [Member]
Commitments And Contingencies [Line Items]
Financing lease costs	$ 375,000
Monthly lease payments	$ 3,530						$ 7,000	$ 7,000
Financing lease term	60 months
Effective interest rate	7.58%
Security interest	100.00%
Initial installment maturity date	Oct. 01, 2019

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Inventories, Net - Schedule of Inventory (Details) - USD ($)	Sep. 30, 2019	Mar. 31, 2019
Inventory Disclosure [Abstract]
Finished Goods	$ 10,948,842	$ 5,679,245
Inventory in Transit	2,736,639
Estimated Cost of Future Returns	1,857,244	599,066
Subtotal	15,542,725	6,278,311
Less: Inventory Reserve	254,000	254,000
Total Inventories	$ 15,288,725	$ 6,024,311

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Inventories, Net

6 Months Ended

Sep. 30, 2019

Inventory Disclosure [Abstract]

Inventories, Net

NOTE 4 - INVENTORIES, NET

Inventories are comprised of the following components:

	September 30, 2019		March 31, 2019
Finished Goods	$	10,948,842	$	5,679,245
Inventory in Transit		2,736,639		-
Estimated Amount of Future Returns		1,857,244		599,066
Subtotal		15,542,725		6,278,311
Less:Inventory Reserve		254,000		254,000
Inventories, net	$	15,288,725	$	6,024,311

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Stock Options

6 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

Stock Options

NOTE 8 - STOCK OPTIONS

During the six months ended September 30, 2019 the Company issued 100,000 stock options at an exercise price of $.38 to directors as compensation for their service.

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

● For six months ended September 30, 2019: expected dividend yield of 0%, risk-free interest rate of 2.08%, volatility of 112.3% and an expected term of three years.

A summary of stock option activity for the six months ended September 30, 2019 is summarized below:

	September 30, 2019
	Number of Options			Weighted Average Exercise Price
Stock Options:
Balance at beginning of period		2,210,000		$	0.25
Granted		100,000		$	0.38
Exercised		(60,000	)	$	0.17
Balance at end of period		2,250,000		$	0.26
Options exercisable at end of period		2,150,000		$	0.25

The following table summarizes information about employee stock options outstanding at September 30, 2019:

Range of Exercise Price	Number Outstanding at September 30, 2019		Weighted Average Remaining Contractural Life		Weighted Average Exercise Price		Number Exercisable at September 30, 2019		Weighted Average Exercise Price
$.03 - $.32		1,570,000		3.7		0.16		1,570,000		0.16
$.38 - $.55		680,000		8.3		0.42		580,000		0.50
*		2,250,000						2,150,000

* Total number of options outstanding as of September 30, 2019 includes 500,000 options issued to five current and two former directors as compensation and 1,150,000 options issue to key employees that were not issued from the Plan.

As of September 30, 2019 there was unrecognized expense of approximately $10,000 remaining on options currently vesting over time with approximately six months remaining until these options are fully vested.

The intrinsic value of vested options as of September 30, 2019 was approximately $134,000.

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Reserve for Sales Returns

6 Months Ended

Sep. 30, 2019

Reserve For Sales Returns

Reserve for Sales Returns

NOTE 12 – RESERVE FOR SALES RETURNS

A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months). The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates.

The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the condensed consolidated balance sheets.

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

	Six Months Ended
	September 30,			September 30,
	2019			2018
Reserve for sales returns at beginning of the period	$	896,154		$	726,000
Provision for estimated sales returns		3,543,813			1,883,366
Sales returns received		(1,209,322	)		(1,142,739	)
Reserve for sales returns at end of the period	$	3,230,645		$	1,466,627

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Summary of Accounting Policies (Policies)

6 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Principles of Consolidation and Basis of Presentation

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements. The accompanying unaudited financial statements for the three and six months ended September 30, 2019 and 2018 have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet information as of March 31, 2019 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019. The interim condensed consolidated financial statements should be read in conjunction with that report.

Use of Estimates

USE OF ESTIMATES

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

Collectability of Accounts Receivable

COLLECTIBILITY OF ACCOUNTS RECEIVABLE

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

The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices.

Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations.

Foreign Currency Translation

FOREIGN CURRENCY TRANSLATION

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

Concentration of Credit Risk

Concentration of Credit Risk

At times, the Company maintains cash in United States bank accounts that are more than the Federal Deposit Insurance Corporation insured amounts. The Company also maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at September 30, 2019 and March 31, 2019 are approximately $2,134,000 and $211,000, respectively.

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

Inventory

INVENTORY

Inventories are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected future inventory returns due to warranty and allowance programs. As of September 30, 2019 and March 31, 2019 the estimated amounts for these future inventory returns were approximately $1,857,000 and $599,000, respectively. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of September 30, 2019 and March 31, 2019 the Company had inventory reserves of approximately $254,000 for estimated excess and obsolete inventory.

Long-Lived Assets

LONG-LIVED ASSETS

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

Property and Equipment

PROPERTY AND EQUIPMENT

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

Fair Value of Financial Instruments

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

Revenue Recognition and Reserve for Sales Returns

REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS

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

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

The Company disaggregates revenues by major geographic region as most of its revenue is generated by the sales of karaoke hardware and the Company has no other material business segments (See NOTE 9).

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

The Company’s reserve for sales returns were approximately $3,231,000 and $896,000 as of September 30, 2019 and March 31, 2019, respectively.

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

	Three Months Ended				Six Months Ended
Product Line		9/30/2019		9/30/2018		9/30/2019		9/30/2018
Classic Karaoke Machines	$	11,737,193	$	15,496,872	$	15,893,233	$	16,507,383
Download Karaoke Machines		4,005,488		5,792,683		4,146,488		6,003,683
SMC Kids Toys		418,716		1,466,087		558,716		1,593,087
Music and Accessories		3,920,445		1,549,303		4,292,445		2,037,303
Total Net Sales	$	20,081,842	$	24,304,945	$	24,890,882	$	26,141,456

Shipping and Handling Costs

SHIPPING AND HANDLING COSTS

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

Stock Based Compensation

STOCK BASED COMPENSATION

The Company follows the provisions of the FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the condensed consolidated statements of operations over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense for the three and six months ended September 30, 2019 and 2018 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award. For the three months ended September 30, 2019 and 2018, the stock option expense was approximately $5,000 and $10,000, respectively. For the six months ended September 30, 2019 and 2018, the stock option expense was $10,000 and $21,000, respectively.

Advertising

ADVERTISING

Costs incurred for producing and publishing advertising of the Company are charged to operations the first time the advertising takes place. The Company has entered into cooperative advertising agreements with its major customers that specifically indicate that the customer must spend the cooperative advertising fund upon the occurrence of mutually agreed events. The percentage of the cooperative advertising allowance ranges from 1% to 13% of the purchase. The customers must advertise the Company’s products in the customer’s catalog, local newspaper and other advertising media. The customer must submit the proof of the performance (such as a copy of the advertising showing the Company’s products) to the Company to request for the allowance. The customer does not have the ability to spend the allowance at their discretion. The Company believes that the identifiable benefit from the cooperative advertising program and the fair value of the advertising benefit is equal or greater than the cooperative advertising expense. Advertising expense for the three months ended September 30, 2019 and 2018 was approximately $1,419,000 and $1,280,000, respectively. Advertising expense for the six months ended September 30, 2019 and 2018 was approximately $1,780,000 and $1,549,000, respectively As of September 30, 2019 and March 31, 2019 there was an accrual for cooperative advertising allowances of $664,000 and $185,000, respectively. These amounts were a component of accrued expenses in the condensed consolidated balance sheets.

Research and Development Costs

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to results of operations as incurred. These expenses are shown as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. For the three months ended September 30, 2019 and 2018, these amounts totaled approximately $18,000 and $21,000, respectively. For the six months ended September 30, 2019 and 2018, these amounts totaled $23,000 and $37,000 respectively.

Income Taxes

INCOME TAXES

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

The Company analyzes its deferred tax assets and liabilities at the end of each interim period and, based on management’s best estimate of its full year effective tax rate, recognizes cumulative adjustments to its deferred tax assets and liabilities. For the six months ended September 30, 2019 and 2018 we estimated our effective tax rate to be approximately 18% and 23%, respectively. As of September 30, 2019 and March 31, 2019, the Singing Machine had gross deferred tax assets of approximately $813,000 and $758,000, respectively. The Company recorded an income tax provision of approximately $184,000 and $378,000 for the three months ended September 30, 2019 and 2018, respectively. The Company recorded an income tax benefit of approximately $55,000 for the six months ended September 30, 2019 and an income tax provision of approximately $55,000 for the six months ended September 30, 2018.

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

Computation of Earnings Per Share

COMPUTATION OF EARNINGS PER SHARE

Income per common share is computed by dividing net income by the weighted average of common shares outstanding during the period. As of September 30, 2019 and 2018 total potential dilutive shares from common stock options amounted to approximately 2,250,000 and 2,350,000 shares, respectively. These shares were not included in the computation of diluted earnings per share for the six months ended September 30, 2019 because their effect was anti-dilutive. These shares were included in the computation of diluted earnings per share for the three months ended September 30, 2019 and 2018 and six months ended September 30, 2018.

Adoption of New Accounting Standards

ADOPTION OF NEW ACCOUNTING STANDARDS

In February 2016, the FASB issued ASU 2016-02, Topic 842, as amended, “Leases”. The ASU requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. On April 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its disclosures for the comparative periods. (See Note 7– LEASES).

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

Recent Accounting Pronouncements

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326). This ASU represents a significant change in the current accounting model by requiring immediate recognition of management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which delayed recognition of expected losses that might not yet have met the threshold of being probable. The amendments in ASU 2016-03 are effective for fiscal years beginning after April 1, 2020 including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of this updated guidance on our consolidated financial statements and related disclosures.

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Commitments and Contingencies (Tables)

6 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Schedule of Supplemental Information Related to Leases

Supplemental balance sheet information related to leases as of September 30, 2019 is as follows:
Assets:
Operating lease - right-of-use assets	$	845,703
Finance leases as a component of Property and equipment, net of accumulated depreciation of $8,809		34,717
Liabilities
Current
Current portion of operating leases	$	567,340
Current portion of finance leases		14,681
Noncurrent
Operating lease liabilities, net of current portion	$	377,066
Finance leases, net of current portion		10,096

Supplemental statement of operations information related to leases for the three and six months ended September 30, 2019 is as follows:
	Three Months Ended		Six Months Ended
	September 30 2019		September 30 2019
Operating lease expense as a component of general and administrative expenses	$	148,724	$	297,448
Finance lease cost
Depreciation of leased assets as a component of depreciation	$	1,555	$	3,110
Interest on lease liabilities as a component of interest expense	$	250	$	533

Supplemental cash flow information related to leases for the six months ended September 30, 2019 is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow paid for operating leases	$	324,783
Financing cash flow paid for finance leases	$	7,136

Schedule of Lease term and Discount Rate

Lease term and Discount Rate
Weighted average remaining lease term (months)	31.7
Operating leases	20.0
Finance leases
Weighted average discount rate
Operating leases	6.25	%
Finance leases	3.68	%

Schedule of Future Minimum Rental Payments for Operating and Finance Leases

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

Year	Operating Leases		Finance Leases
2020, for the remaining 6 months	$	326,374	$	7,673
2021		348,562	$	15,347
2022		115,814		2,558
2023		117,638		-
2024		121,167		-
Total Minimum Future Payments		1,029,555		25,578
Less: Imputed Interest		85,149		801
Present Value of Lease Liabilities	$	944,406	$	24,777

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Related Party Transactions (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2019
Related Party Transaction [Line Items]
Due from related parties, current	$ 1,203,000		$ 1,203,000		$ 289,000
Due to related parties	260,000		260,000		0
Proceeds from line of credit			4,428,588	$ 6,877,610
Warehouse Facility [Member]
Related Party Transaction [Line Items]
Revenue from related parties	168,000	$ 593,000	$ 239,000	638,000
Revolving Credit Facility [Member]
Related Party Transaction [Line Items]
Line of credit facility interest rate			0.75%
Revolving Credit Facility [Member] | Subordinate Debt [Member]
Related Party Transaction [Line Items]
Line of credit facility, maximum amount outstanding during period			$ 924,000
Line of credit facility interest rate			6.00%
Line of credit facility, periodic payment			$ 123,000
Debt maturity date			Jun. 30, 2019
Line of credit outstanding	803,000		$ 803,000		$ 815,000
Payment of debt	25,000		25,000
Interest expense, related party	0	7,000	2,000	16,000
Winglight Pacific Ltd [Member]
Related Party Transaction [Line Items]
Revenue from related parties	$ 778,000	$ 1,150,000	$ 852,000	$ 1,150,000
Related party gross margin percentage	23.90%	30.10%	23.70%	30.10%
Starlight Electronics Co., Ltd [Member]
Related Party Transaction [Line Items]
Incurred service expenses from related party	$ 90,000	$ 85,000	$ 191,000	$ 181,000

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Document And Entity Information - shares	6 Months Ended
	Sep. 30, 2019	Nov. 14, 2019
Document And Entity Information [Abstract]
Entity Registrant Name	SINGING MACHINE CO INC
Entity Central Index Key	0000923601
Document Type	10-Q
Document Period End Date	Sep. 30, 2019
Amendment Flag	false
Current Fiscal Year End Date	--03-31
Entity Current Reporting Status	Yes
Entity Interactive Data Current	No
Entity Filer Category	Non-accelerated Filer
Entity Small Business Flag	true
Entity Emerging Growth Company	false
Entity Ex Transition Period	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		38,557,643
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2020

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Stock Options - Summary of Stock Option Activity (Details)	6 Months Ended
	Sep. 30, 2019 $ / shares shares
Number of Options Granted | shares	100,000
Weighted Average Exercise Price Granted | $ / shares	$ .38
Stock Option [Member]
Number of Options, Balance at Beginning of Year | shares	2,210,000	[1]
Number of Options Granted | shares	100,000
Number of Options Exercised | shares	(60,000)
Number of Options, Balance at End of Year | shares	2,250,000
Number of Options, Exercisable at End of Year | shares	2,150,000
Weighted Average Exercise Price, Balance at Beginning of Year | $ / shares	$ 0.25	[1]
Weighted Average Exercise Price Granted | $ / shares	0.38
Weighted Average Exercise Price Exercised | $ / shares	0.17
Weighted Average Exercise Price, Balance at End of Period | $ / shares	0.26
Weighted Average Exercise Price, Options Exercisable at End of Year | $ / shares	$ 0.25

[1] Total number of options outstanding as of March 31, 2019 includes 460,000 options issued to five current and two former directors as compensation and 1,150,000 options issue to key employees that were not issued from the Plan.

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)	6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash flows from operating activities
Net (loss) income	$ (245,359)	$ 183,278
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation	119,049	135,781
Amortization of deferred financing costs	6,666	6,667
Change in inventory reserve		(81,780)
Change in allowance for bad debts	280,099	285,919
Stock based compensation	22,504	33,330
Change in net deferred tax assets	(54,591)	54,746
Changes in operating assets and liabilities:
Accounts receivable	(14,759,924)	(19,152,434)
Due from PNC Bank	2,236,779	6,212
Accounts receivable - related parties	(913,720)	(861,538)
Insurance claim receivable	(1,247,981)
Inventories	(9,264,414)	(4,276,018)
Prepaid expenses and other current assets	16,667	(165,392)
Other non-current assets	(104,659)	(516)
Accounts payable	16,614,553	17,040,099
Accrued expenses	827,153	831,187
Due to related parties	259,767	217,595
Customer deposits	66,923	36,691
Refunds due to customers	1,617,698	(434,300)
Reserve for sales returns	2,334,491	740,627
Operating lease liabilities, net of operating leases - right of use assets	(27,335)
Net cash used in operating activities	(2,215,634)	(5,399,846)
Cash flows from investing activities
Purchase of property and equipment	(213,186)	(288,740)
Net cash used in investing activities	(213,186)	(288,740)
Cash flows from financing activities
Net proceeds from revolving line of credit	4,428,588	6,877,610
Proceeds from installment note	175,840
Proceeds from subscription receivable	2,200
Proceeds from exercise of stock options	10,200	6,400
Payment of bank term note	(125,000)	(250,000)
Payment on subordinated debt - related party	(12,708)
Payments on finance leases	(7,136)	(4,603)
Net cash provided by financing activities	4,471,984	6,629,407
Net change in cash	2,043,164	940,821
Cash at beginning of period	211,408	813,908
Cash at end of period	2,254,572	1,754,729
Supplemental disclosures of cash flow information:
Cash paid for interest	62,370	52,513
Equipment purchased under capital lease		43,526
Operating leases - right of use assets initial adoption	1,108,330
Operating lease liabilities - initial adoption	$ 1,234,368

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Summary of Accounting Policies

6 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Summary of Accounting Policies

NOTE 3 - SUMMARY OF ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements. The accompanying unaudited financial statements for the three and six months ended September 30, 2019 and 2018 have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet information as of March 31, 2019 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019. The interim condensed consolidated financial statements should be read in conjunction with that report.

USE OF ESTIMATES

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

COLLECTIBILITY OF ACCOUNTS RECEIVABLE

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

The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices.

Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations.

FOREIGN CURRENCY TRANSLATION

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

Concentration of Credit Risk

At times, the Company maintains cash in United States bank accounts that are more than the Federal Deposit Insurance Corporation insured amounts. The Company also maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at September 30, 2019 and March 31, 2019 are approximately $2,134,000 and $211,000, respectively.

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

INVENTORY

Inventories are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected future inventory returns due to warranty and allowance programs. As of September 30, 2019 and March 31, 2019 the estimated amounts for these future inventory returns were approximately $1,857,000 and $599,000, respectively. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of September 30, 2019 and March 31, 2019 the Company had inventory reserves of approximately $254,000 for estimated excess and obsolete inventory.

LONG-LIVED ASSETS

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

PROPERTY AND EQUIPMENT

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS

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

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

The Company disaggregates revenues by major geographic region as most of its revenue is generated by the sales of karaoke hardware and the Company has no other material business segments (See NOTE 9).

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

The Company’s reserve for sales returns were approximately $3,231,000 and $896,000 as of September 30, 2019 and March 31, 2019, respectively.

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

	Three Months Ended				Six Months Ended
Product Line		9/30/2019		9/30/2018		9/30/2019		9/30/2018
Classic Karaoke Machines	$	11,737,193	$	15,496,872	$	15,893,233	$	16,507,383
Download Karaoke Machines		4,005,488		5,792,683		4,146,488		6,003,683
SMC Kids Toys		418,716		1,466,087		558,716		1,593,087
Music and Accessories		3,920,445		1,549,303		4,292,445		2,037,303
Total Net Sales	$	20,081,842	$	24,304,945	$	24,890,882	$	26,141,456

SHIPPING AND HANDLING COSTS

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

STOCK BASED COMPENSATION

The Company follows the provisions of the FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the condensed consolidated statements of operations over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense for the three and six months ended September 30, 2019 and 2018 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award. For the three months ended September 30, 2019 and 2018, the stock option expense was approximately $5,000 and $10,000, respectively. For the six months ended September 30, 2019 and 2018, the stock option expense was $10,000 and $21,000, respectively.

ADVERTISING

Costs incurred for producing and publishing advertising of the Company are charged to operations the first time the advertising takes place. The Company has entered into cooperative advertising agreements with its major customers that specifically indicate that the customer must spend the cooperative advertising fund upon the occurrence of mutually agreed events. The percentage of the cooperative advertising allowance ranges from 1% to 13% of the purchase. The customers must advertise the Company’s products in the customer’s catalog, local newspaper and other advertising media. The customer must submit the proof of the performance (such as a copy of the advertising showing the Company’s products) to the Company to request for the allowance. The customer does not have the ability to spend the allowance at their discretion. The Company believes that the identifiable benefit from the cooperative advertising program and the fair value of the advertising benefit is equal or greater than the cooperative advertising expense. Advertising expense for the three months ended September 30, 2019 and 2018 was approximately $1,419,000 and $1,280,000, respectively. Advertising expense for the six months ended September 30, 2019 and 2018 was approximately $1,780,000 and $1,549,000, respectively As of September 30, 2019 and March 31, 2019 there was an accrual for cooperative advertising allowances of $664,000 and $185,000, respectively. These amounts were a component of accrued expenses in the condensed consolidated balance sheets.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to results of operations as incurred. These expenses are shown as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. For the three months ended September 30, 2019 and 2018, these amounts totaled approximately $18,000 and $21,000, respectively. For the six months ended September 30, 2019 and 2018, these amounts totaled $23,000 and $37,000 respectively.

INCOME TAXES

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

The Company analyzes its deferred tax assets and liabilities at the end of each interim period and, based on management’s best estimate of its full year effective tax rate, recognizes cumulative adjustments to its deferred tax assets and liabilities. For the six months ended September 30, 2019 and 2018 we estimated our effective tax rate to be approximately 18% and 23%, respectively. As of September 30, 2019 and March 31, 2019, the Singing Machine had gross deferred tax assets of approximately $813,000 and $758,000, respectively. The Company recorded an income tax provision of approximately $184,000 and $378,000 for the three months ended September 30, 2019 and 2018, respectively. The Company recorded an income tax benefit of approximately $55,000 for the six months ended September 30, 2019 and an income tax provision of approximately $55,000 for the six months ended September 30, 2018.

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

COMPUTATION OF EARNINGS PER SHARE

Income per common share is computed by dividing net income by the weighted average of common shares outstanding during the period. As of September 30, 2019 and 2018 total potential dilutive shares from common stock options amounted to approximately 2,250,000 and 2,350,000 shares, respectively. These shares were not included in the computation of diluted earnings per share for the six months ended September 30, 2019 because their effect was anti-dilutive. These shares were included in the computation of diluted earnings per share for the three months ended September 30, 2019 and 2018 and six months ended September 30, 2018.

ADOPTION OF NEW ACCOUNTING STANDARDS

In February 2016, the FASB issued ASU 2016-02, Topic 842, as amended, “Leases”. The ASU requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. On April 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its disclosures for the comparative periods. (See Note 7– LEASES).

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

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326). This ASU represents a significant change in the current accounting model by requiring immediate recognition of management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which delayed recognition of expected losses that might not yet have met the threshold of being probable. The amendments in ASU 2016-03 are effective for fiscal years beginning after April 1, 2020 including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of this updated guidance on our consolidated financial statements and related disclosures.