COMMITMENTS AND CONTINGENCIES

9 Months Ended

Dec. 31, 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, COVID-19 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. Although the negative effects on the health of the U.S. economy have somewhat subsided, COVID-19 may continue to have negative effects in the future. We have, however, experienced various degrees of manufacturing cost pressures due to raw material and electronic component shortages, unpredictable variability in both the cost and timing of shipments of materials from China, 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 any future COVID-19 outbreaks or significant changes in economic conditions such as inflation, including product and shipping costs, could cause a disruption in our ability to obtain raw materials or components required to manufacture our products. Likewise, logistical supply chain issues could 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 SMCL committed employment practice violations against a former temporary employee not employed by us. Management investigated the allegation and engaged an employment attorney to defend the lawsuit. The complaint sought damages estimated to be no less than $500,000 in money judgement. The case was referred to arbitration and a settlement agreement was negotiated in favor of the plaintiff and settled for $30,000 and the case dismissed on December 13, 2022.

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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Unaudited)

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 2025.

We entered into a three-year operating lease agreement, effective October 15, 2022 for our Hong Kong office operations. The lease will expire on October 14, 2025. The base rent payment is fixed at approximately $4,877 per month for the entire term of the lease.

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 $69,277 per month 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 December 31, 2022 and March 31, 2022, the remaining amounts due on this capital leasing arrangement was approximately $13,000 and $18,000, respectively. For the three months ended December 31, 2022 and 2021, the Company incurred interest expense of $342 and $696, respectively. For the nine months ended December 31, 2022 and 2021, the Company incurred interest expense of $1,170 and $696, respectively.

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

Assets:
Operating lease - right-of-use assets	$	648,323
Finance leases as a component of Property and equipment, net of accumulated depreciation of $4,859		6,692
Liabilities
Current
Current portion of operating leases	$	654,883
Current portion of finance leases		8,187
Noncurrent
Operating lease liabilities, net of current portion	$	30,422
Finance leases, net of current portion		4,405

Supplemental statement of operations information related to leases for the three and nine months ended December 31, 2022 is as follows:

	Three Months Ended		Nine Months Ended
	December 31 2022		December 31 2022
Operating lease expense as a component of general and administrative expenses	$	227,839	$	684,926
Finance lease cost
Depreciation of leased assets as a component of depreciation	$	1,041	$	5,900
Interest on lease liabilities as a component of interest expense	$	342	$	1,170

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

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow paid for operating leases			$	632,428
Financing cash flow paid for finance leases			$	5,633
Lease term and Discount Rate
Weighted average remaining lease term (months)
Operating leases	9.5
Finance leases	18.0
Weighted average discount rate
Operating leases	6.25	%
Finance leases	9.86	%

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

Year	Operating Leases		Finance Leases
2023	$	674,488	$	9,065
2024		30,739		4,533
Total Minimum Future Payments		705,227		13,598
Less: Imputed Interest		19,922		1,006
Present Value of Lease Liabilities	$	685,305	$	12,592

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Unaudited)