COMMITMENTS AND CONTINGENCIES

3 Months Ended

Jun. 30, 2022

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 8 - COMMITMENTS AND CONTINGENCIES

COVID-19

In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community. The WHO declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future. We continue to experience various degrees of manufacturing cost pressures due to raw material and electronic component shortages as well as inflationary price increases. Although we regularly monitor the financial health and operations of companies in our supply chain, and use alternative suppliers when necessary and available, any financial hardship or government restrictions on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to manufacture our products. Likewise, logistical supply chain issues may continue to cause delays in the delivery of finished goods. Any of these conditions could adversely affect our operations.

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 Bernardino 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.

LEASES

Operating Leases

We have operating lease agreements for offices and a warehouse facility in Florida, California 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 $9,700 per month, subject to annual adjustments.

We entered into an operating lease agreement, effective June 1, 2013 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 approximately $67,300 with a 3% increase every 12 months for the remaining term of the extension.

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 requires 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 June 30, 2022 and March 31, 2022, the remaining amounts due on this capital leasing arrangement was approximately $16,000 and $18,000, respectively. For the three months ended June 30, 2022 and 2021 the Company incurred interest expense of $439 and $0, respectively.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022 and 2021

(Unaudited)

Supplemental balance sheet information related to leases as of June 30, 2022 is as follows:

Assets:
Operating lease - right-of-use assets	$	1,072,576
Finance leases as a component of Property and equipment, net of accumulated depreciation of $3,817		22,558
Liabilities
Current
Current portion of operating leases	$	897,956
Current portion of finance leases		7,794
Noncurrent
Operating lease liabilities, net of current portion	$	226,369
Finance leases, net of current portion		8,599

Supplemental statement of operations information related to leases for the three months ended June 30, 2022 is as follows:

	Three Months Ended
	June 30, 2022
Operating lease expense as a component of general and administrative expenses	$	229,249
Finance lease cost
Depreciation of leased assets as a component of depreciation	$	6,817
Interest on lease liabilities as a component of interest expense	$	439

Supplemental cash flow information related to leases for the nine months ended  June 30, 2022 is as follows:        

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow paid for operating leases	$	235,765
Financing cash flow paid for finance leases	$	1,832
Lease term and Discount Rate
Weighted average remaining lease term (months)
Operating leases		15.2
Finance leases		25.0
Weighted average discount rate
Operating leases		6.25	%
Finance leases		9.86	%

Scheduled maturities of operating and finance lease liabilities outstanding as of June 30, 2022 are as follows:

Year	Operating Leases		Finance Leases
2022 - for the remaining 9 months	$	708,120	$	6,799
2023		467,552		9,065
2024		-		2,206
Total Minimum Future Payments		1,175,672		18,070
Less: Imputed Interest		51,347		1,677
Present Value of Lease Liabilities	$	1,124,325	$	16,393