COMMITMENTS AND CONTINGENCIES

12 Months Ended

Mar. 31, 2022

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 7 - COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

On September 11, 2020 a complaint was filed against the Company’s SMCL subsidiary and various staffing agencies used by SMCL in a Superior Court of San Bernadino County. The complaint alleges an employee of the Company committed employment practice violations against a former temporary employee not employed by us. Management has investigated the allegation and has engaged an employment attorney to defend the lawsuit. The case is still in discovery and no trial date has been set. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on our financial results.

On April 29, 2022, a complaint was filed by Tunnel IP LLC against the Company in the U.S District Court for the Southern District of Florida. The Complaint alleges that one of the Company’s products, SDL2093, infringes on U.S. Patent No. 7,916,877. On June 24, 2022, Tunnel IP agreed to dismiss all claims against the Company with prejudice.

Other than as disclosed above, we are not a party to, and our property is not the subject of, any material legal proceedings.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022 and 2021

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.

Operating Leases

We have operating lease agreements for offices and a warehouse facility in Florida, California and Macau 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 . The lease expires on March 31, 2024. The base rent payment is approximately $9,400 per month, subject to annual adjustments.

We entered into an operating lease agreement, effective June 1, 2013, for warehouse space in Ontario, California for our logistics operations. On June 15, 2020 we executed a three-year lease extension which will expire on August 31, 2023. The renewal base rent payment is $65,300 per month with a 3% increase every 12 months for the remaining term of the extension.

We entered into an operating lease agreement, effective May 1, 2018, for office space in Macau. The rent is fixed at approximately $1,600 per month for the duration of the lease which expired on April 30, 2021. In May 2021 we executed a one-year lease extension which expired on April 30, 2022. The lease provides for a renewal option to extend the lease. Rent expense on the new lease was fixed at approximately $1,700 per month for the duration of the lease term. We elected not renew our lease of our office space in Macau and all administrative duties previously performed in this office are now performed by our administrative team in Hong Kong. Our administrative team in Hong Kong are subcontractors who work in office space provided and owned by Starlight Electronics Limited (“SEL”). We pay SEL approximately $30,000 per month for our subcontracted Hong Kong staff which includes the use of office space.

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

Finance Leases

On July 1, 2021, we entered into a long-term capital leasing arrangement with Union Credit Corporation to finance the leasing of a used forklift in the amount of approximately $24,000. The lease require monthly payments in the amount of approximately $755 per month over a total lease term of 36 months which commenced on July 1, 2021. The agreement has an effective interest rate of 9.9% and the Company has the option to purchase the equipment at the end of the lease term for one dollar. As of March 31, 2022 and March 31, 2021, the remaining amounts due on this capital leasing arrangement was approximately $18,000 and $20,000, respectively. For the fiscal years ended March 31, 2022 and 2021 the Company incurred interest expense of $1,160 and $0, respectively.

Supplemental balance sheet information related to leases as of March 31, 2022 is as follows:

Assets:
Operating lease - right-of-use assets	$	1,279,347
Finance leases as a component of property and equipment, net of accumulated depreciation of $2,776		15,449
Liabilities
Current
Current portion of operating leases	$	876,259
Current portion of finance leases		7,605
Noncurrent
Operating lease liabilities, net of current portion	$	457,750
Finance leases, net of current portion		10,620

Supplemental statement of operations information related to leases for the fiscal year ended March 31, 2022 is as follows:

	Fiscal Year Ended
	March 31, 2022
Operating lease expense as a component of general and administrative expenses	$	813,292
Finance lease cost
Depreciation of leased assets as a component of depreciation	$	2,776
Interest on finance lease liabilities as a component of interest expense	$	1,547

Supplemental cash flow information related to leases for the nine months ended March 31, 2022 is as follows:

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow paid for operating leases	$	928,640
Financing cash flow paid for finance leases	$	7,973
Lease term and Discount Rate
Weighted average remaining lease term (months)
Operating leases		18.2
Finance leases		28.0
Weighted average discount rate
Operating leases		6.25	%
Finance leases		9.86	%

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022 and 2021

Scheduled maturities of operating and finance lease liabilities outstanding as of March 31, 2022 are as follows:

Fiscal Year	Operating Leases		Finance Leases
2023	$	940,282	$	9,065
2024		467,552		9,065
2025				2,267
Total Minimum Future Payments		1,407,834		20,397
Less: Imputed Interest		128,487		2,172
Present Value of Lease Liabilities	$	1,279,347	$	18,225