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What changed in Algorhythm Holdings, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Algorhythm Holdings, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+323 added−245 removedSource: 10-K (2023-07-14) vs 10-K (2022-07-14)

Top changes in Algorhythm Holdings, Inc.'s 2023 10-K

323 paragraphs added · 245 removed · 151 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeSales and Marketing Our products are marketed and sold through our direct sales team, working in conjunction with independent sales representatives that provide sales and customer support for our retail customers in North America. Sales are recognized upon transfer of title to our customers and are made utilizing standard credit terms of approximately 60-90 days.
Biggest changeWe do not intend to renew the lease agreement and have signed a service agreement with a third-party logistics company to provide domestic and Canadian warehousing services, effective September 1, 2023. 6 Sales and Marketing Our products are marketed and sold through our direct sales team, working in conjunction with independent sales representatives that provide sales and customer support for our retail customers in North America.
Our mission is to “create joy through music.” In order to deliver on this mission, we are focused on the following multi-prong approach: ● In the short-term, improve profitability by optimizing operations and continue to expand gross margins. ● In the mid-to-long-term, continue to grow our global distribution and expand into new product categories that take advantage of our vast distribution relationships and sourcing abilities.
Our mission is to “create joy through music.” In order to deliver on this mission, we are focused on the following multi-prong approach: ● In the short-term, improve profitability by optimizing operations and continue to expand gross margins; and ● In the mid-to-long-term, continue to grow our global distribution and expand into new product categories that take advantage of our vast distribution relationships and sourcing abilities.
All of our products are independently tested by third party laboratories accepted by the Consumer Product Safety Commission to verify compliance to applicable safety standards. A similar approach is used to design and test products sold internationally. Insurance We carry product liability insurance that provides us with $10,000,000 coverage with a minimal deductible.
All of our products are independently tested by third party laboratories accepted by the Consumer Product Safety Commission to verify compliance to applicable safety standards. A similar approach is used to design and test products sold internationally. 7 Insurance We carry product liability insurance that provides us with $10,000,000 coverage with a minimal deductible.
We buy finished goods from our suppliers and generally do not source raw materials for manufacturing, however in limited circumstances where we develop proprietary hardware and software, we will secure the proprietary circuits and provide to our contract manufacturers for assembly into the final product.
We buy finished goods from our suppliers and generally do not source raw materials for manufacturing, however in limited circumstances where we develop proprietary hardware and software, we will secure the proprietary circuits and provide them to our contract manufacturers for assembly into the final product.
In total approximately 51% of the Company’s shares of common stock on a fully diluted basis as of March 31, 2021 were previously owned by koncepts and Treasure Green. koncepts and Treasure Green are owned by Fairy King Prawn Holdings Limited (“Fairy King”), an investment holding company incorporated in the British Virgin Islands, principally owned by the Company’s then Chairman, Philip Lau.
In total, approximately 51% of our shares of common stock on a fully diluted basis as of March 31, 2021 were previously owned by koncepts and Treasure Green. koncepts and Treasure Green are owned by Fairy King Prawn Holdings Limited (“Fairy King”), an investment holding company incorporated in the British Virgin Islands, principally owned by our then Chairman, Philip Lau.
Our largest international territories are the U.K. and Australia, where we sell through international distributors, representatives. We also sell to select international retail customers in geographic locations where we do not have a direct sales presence. 4 Suppliers and Manufacturing We source our products from a variety of contract manufacturers in southern China.
Our largest international territories are the U.K. and Australia, where we sell through international distributors. We also sell to select international retail customers in geographic locations where we do not have a direct sales presence. Suppliers and Manufacturing We source our products from a variety of contract manufacturers in southern China.
In 2019, we entered into a 3-year license agreement with CBS® for its Carpool Karaoke brand, made popular by James Corden on The Late Show with James Corden. We launched an innovative Carpool Karaoke Microphone that works specifically in the car. This license agreement with CBS® expires on September 30, 2022.
In 2019, we entered into a 3-year license agreement with CBS ® for its Carpool Karaoke brand, made popular by James Corden on The Late Show with James Corden. We launched an innovative Carpool Karaoke Microphone that works specifically in the car. This license agreement with CBS expired on September 30, 2022.
ITEM 1. BUSINESS OVERVIEW We are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings. We are the leading global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children.
ITEM 1. BUSINESS Overview We are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings. We believe we are a leading global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children.
Competition The youth electronics, toy, and music industry has many participants, none of which has dominant market share, though certain companies may have disproportionate strength in specific product categories. We compete with a number of different companies in a variety of categories, although there is no single company that competes with us across all of our product categories.
Competition The youth electronics, toy, and music industries have many participants, none of which have a dominant market share, though certain companies may have disproportionate strength in specific product categories. We compete with a number of different companies in a variety of categories, although there is no single company that competes with us across all of our product categories.
We have no long-term contracts with these customers, and as a result, our success depends heavily on our customers’ willingness to purchase and provide shelf space for our products. 5 Seasonality We do experience heightened seasonal demand for our products in our second and third quarters of our fiscal year.
We have no long-term contracts with these customers, and as a result, our success depends heavily on our customers’ willingness to purchase and provide floor or shelf space for our products. Seasonality We do experience heightened seasonal demand for our products in our second and third quarters of our fiscal year.
We are not dependent on any one supplier as we use many manufacturers (currently over 5) to make our products. We maintain a Hong Kong office that provides us with factory management, sourcing, quality control, engineering, and product development.
We are not dependent on any one supplier as we use many manufacturers (currently five) to make our products. We maintain a Hong Kong office that provides us with factory management, sourcing, quality control, engineering, and product development.
On August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with koncepts and Treasure Green, pursuant to which the Company redeemed 654,105 shares of common stock of the Company (the “Redeemed Shares”).
On August 5, 2021, we entered into a stock redemption agreement (the “Redemption Agreement”) with koncepts and Treasure Green, pursuant to which we redeemed 654,105 shares of our common stock (the “Redeemed Shares”).
Our Product Portfolio Our products are sold directly to distributors and retail customers. Our portfolio of owned and licensed brands and products are organized into the following categories: Karaoke — including our flagship brand Singing Machine, our karaoke line is driven by quality products at affordable price points that we believe deliver great value to our customers.
Our portfolio of owned and licensed brands and products are organized into the following categories: 5 Karaoke — including our flagship brand Singing Machine, our karaoke line is driven by quality products at affordable price points that we believe deliver great value to our customers.
The Company’s products are sold directly to consumers via its retail channels, ecommerce, its own website, and distributors worldwide. This product category accounted for approximately 82% of our net sales in our fiscal year ended March 31, 2022. Licensed Products — including brands such as Carpool Karaoke.
Our products are sold directly to consumers via our retail channels, ecommerce, our own website, and distributors worldwide. This product category accounted for approximately 73% of our net sales in our fiscal year ended March 31, 2023. Licensed Products — including brands such as Carpool Karaoke.
In the United States, these safety standards are promulgated by federal, state and independent agencies such as the US Consumer Product Safety Commission, ASTM, the Federal Communications Commission, the Food and Drug Administration, the Federal Trade Commission, and various states Attorney Generals and state regulatory agencies.
In the United States, these safety standards are promulgated by federal, state and independent agencies such as the US Consumer Product Safety Commission, ASTM International, the Federal Communications Commission, and various states Attorney Generals and state regulatory agencies.
(“Treasure Green) which owned approximately 2% of our common stock.
(“Treasure Green”), which owned approximately 2% of our common stock.
The closing of the transaction set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred back to the Company in consideration of a payment by the Company of approximately $7,162,000 to koncepts and Treasure Green.
The closing of the transaction set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred back to us in consideration of a payment by us of approximately $7.2 million to koncepts and Treasure Green. The Redeemed Shares were retired and returned as unissued authorized capital.
Stock Redemption Agreement Prior to August 10, 2021, the Company was partially held by koncepts International Limited (“koncepts”) which was a major shareholder of the Company that owned approximately 49% of our shares of common stock outstanding on a fully diluted basis as of March 31, 2021. The Company was also partly held by Treasure Green Holdings Ltd.
Recent Events and Developments Stock Redemption Agreement Prior to August 10, 2021, we were partially held by koncepts International Limited (“koncepts”) which was a major stockholder of our company, that beneficially owned approximately 49% of our shares of common stock outstanding as of March 31, 2021. We were also partly held by Treasure Green Holdings Ltd.
The Redeemed Shares were retired and returned to the unissued authorized capital of the Company. Prior to August 10, 2021, we did business with a number of entities that are principally owned by the Company’s former Chairman, Philip Lau, including Starlight R&D Ltd (“SLRD”), Starlight Consumer Electronics USA, Inc., (“SCE”), Cosmo Communications Corporation of Canada, Inc.
Prior to August 10, 2021, we did business with a number of entities that are principally owned by our former Chairman, Philip Lau, including Starlight R&D Ltd (“SLRD”), Starlight Consumer Electronics USA, Inc., (“SCE”), Cosmo Communications Corporation of Canada, Inc. (“Cosmo”), Winglight Pacific, Ltd (“Winglight”) and Starlight Electronics Company Ltd (“SLE”), among others.
In our fiscal year ended March 31, 2022 and our fiscal year ended March 31, 2021, approximately 81% and 86%, respectively, of our net sales shipped in our second and third quarters. However, we continually look for products and new categories to reduce our exposure to seasonality variances.
In our fiscal years ended March 31, 2023 and 2022, approximately 62% and 81%, respectively, of our net sales shipped in our second and third quarters. However, we continually look for products and new categories to reduce our exposure to seasonality variances. Regulatory Matters Each of our products is designed to comply with all applicable mandatory and voluntary safety standards.
Customers Sales to our top five customers together comprised approximately 90% of our net sales in both fiscal years ended March 31, 2022 and March 31, 2021. In our fiscal year ended March 31, 2022, revenues from three of these customers represented greater than 10% of net sales at a percentage of 37%, 18%, and 17% of total net sales.
In our fiscal year ended March 31, 2023, revenues from two of these customers represented greater than 10% of net sales, at 48% and 21% of total net sales. In our fiscal year ended March 31, 2022, revenues from three of these customers represented greater than 10% of net sales, at 37%, 18%, and 17% of total net sales.
Our common stock is traded on the NASDAQ Capital Market under the symbol “MICS”. Our principal executive offices are located at 6301 NW 5 th Way, Suite 2900, Fort Lauderdale, FL, and our telephone number is (954) 596-1000. We maintain our corporate website at www.singingmachine.com .
Our principal executive offices are located at 6301 NW 5 th Way, Suite 2900, Fort Lauderdale, FL, and our telephone number is (954) 596-1000. We maintain our corporate website at www.singingmachine.com . Our website also includes corporate governance information, including our Code of Ethics and our Board committee charters.
Our largest direct competitors are Singsation®, Singtrix®, eKids®, Bonaok, Karaoke USA™, and Ion® Audio. The primary method of competition in the industry consists of brand positioning, product innovation, quality, price, and timely distribution. Our competitive strengths include our ability to develop innovative new products, speed to market, our relationships with major retailers, and the quality and pricing of our products.
Our largest direct competitors are Singsation ® , Singtrix ® , eKids ® , Bonaok, Karaoke USA ™ , and Ion ® Audio. The primary methods of competition in the industry consist of brand positioning, product innovation, quality, price, and timely distribution.
Intellectual Property We rely on a combination of word and design mark trademarks and trade secrets to protect our intellectual property. In certain circumstances, we will partner with third parties to develop proprietary products, and, where appropriate, we have license agreements related to the use of third-party innovation in our products.
In certain circumstances, we will partner with third parties to develop proprietary products, and, where appropriate, we have license agreements related to the use of third-party innovation in our products. The duration of our trademark registrations varies from country to country.
These microphones feature an assortment of colors, come wired or wireless, and may include new features like party lighting and voice changing effects. We are also seeing growth in portable Bluetooth® microphones which are marketed under our Party Machine brand. This product category accounted for approximately 9% of our net sales in our fiscal year ended March 31, 2022.
Microphones and Accessories — we currently offer a line of traditional microphone accessories that are compatible with our karaoke machines. These microphones feature an assortment of colors, come wired or wireless, and may include new features like party lighting and voice changing effects. We are also seeing growth in portable Bluetooth microphones which are marketed under our Party Machine brand.
This product category accounted for approximately 5% of our net sales in our fiscal year ended March 31, 2022. Music Subscriptions — in conjunction with our premium partner, Stingray Digital, we offer karaoke music subscription services for the iOS and Android platforms as well as a web-based download store and integrated streaming services for our hardware.
Music Subscriptions — in conjunction with our premium partner, Stingray, we offer karaoke music subscription services for the iOS and Android platforms as well as a web-based download store and integrated streaming services for our hardware. We currently offer almost 20,000 licensed karaoke songs in the catalog.
Our sales terms indicate that we only accept returns for defective merchandise, however we have accepted overstock returns from our retail partners in the past.
Sales are recognized upon transfer of title to our customers and are made utilizing standard credit terms of approximately 60-90 days. Our sales terms indicate that we only accept returns for defective merchandise, however we have accepted overstock returns from our retail partners in the past.
Products are created in conjunction with contract product designers and inventors in collaboration with our contract manufacturers in China to deliver products that represent tremendous value to our customers. In addition to new products, we always look for ways to improve existing products to hit more affordable price points or improve features based upon market feedback.
In addition to new products, we always look for ways to improve existing products to hit more affordable price points or improve features based upon market feedback.
Public Offering On May 23, 2022, we consummated a public offering of 1,000,000 shares of our common stock for gross proceeds of $4.0 million prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $0.7 million. The offering closed on May 26, 2022.
Underwritten Public Offering On May 23, 2022, we entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp., who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten public offering pursuant to which we sold to the Underwriter 1,000,000 shares of our common stock for gross proceeds of $4.0 million, prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $0.6 million.
Our website also includes corporate governance information, including our Code of Ethics and our Board committee charters. The information contained on our website does not constitute a part of this report.
The information contained on our website does not constitute a part of this Annual Report.
We believe our core karaoke line offers best-in-class innovative features that, including but not limited to enables customers to output video to a TV screen, correct singer’s pitch in real-time, stream karaoke content directly to the machine, sing duets, display scrolling lyrics in-time with the song, and play custom karaoke CD+G discs.
We believe our core karaoke line offers best-in-class advanced features, including but not limited to, enabling customers to output video to a TV screen, correcting singer’s pitch in real-time with our proprietary PitchLab™ technology, streaming karaoke content directly to the machine via WiFi, casting karaoke songs from a mobile device to our karaoke machines through our SingCast™ casting technology, singing duets, and displaying scrolling lyrics in-time with the song.
We currently offer almost 20,000 licensed karaoke songs in the catalog. This product category accounted for approximately 1% of our net sales in our fiscal year ended March 31, 2022. Product Development and Design Product development is a key element of our strategic growth plan.
This product category accounted for approximately 2% of our net sales in our fiscal year ended March 31, 2023. Product Development and Design Product development is a key element of our strategic growth plan. We strive to deliver many new, exciting consumer products to market every single year to retain our presence as the market-leader in consumer karaoke products.
As compensation, we issued to the underwriter in the public offering warrants to purchase up to 100,000 shares of our common stock. The warrants are exercisable six months from the commencement of sales under the public offering, have an exercise price of $5.00 per share and expire five years from the date of issuance.
The warrants are exercisable six months from the commencement of sales under the offering, have an exercise price of $5.00 per share and expire five years from the date of issuance. 4 Acquisition of Control On June 13, 2022, Ault Alliance, Inc.
We strive to deliver many new, exciting consumer products to market every single year to retain our presence as the market-leader in consumer karaoke products. Strategic product development is done in-house from our corporate headquarters in Fort Lauderdale, FL where we identify new potential categories, features, and price points.
Strategic product development is done in-house from our corporate headquarters in Fort Lauderdale, FL where we identify new potential categories, features, and price points. Products are created in conjunction with contract product designers and inventors in collaboration with our contract manufacturers in China to deliver products that represent tremendous value to our customers.
The duration of our trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained.
However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained. Customers Sales to our top five customers together comprised approximately 89% and 90% of our net sales for fiscal years ended March 31, 2023 and 2022, respectively.
Singing Machine Kids Youth Electronics — including the brand Singing Machine Kids. Our kids line of products offer fun music entertainment features designed specifically for children. Our kids’ products provide a high-quality introduction to singing and music entertainment for young singers and offer innovative features like voice changing effects, recording, Bluetooth® compatibility, and portability.
Our kids’ products provide a high-quality introduction to singing and music entertainment for young singers and offer advanced features, such as voice changing effects, recording, Bluetooth compatibility, and portability. This product category accounted for approximately 5% of our net sales in our fiscal year ended March 31, 2023.
Human Capital Resources We believe that the development, attraction and retention of employees is an important factor to our Company’s success. We offer our employees a wide range of benefits, including 100% paid health benefits for the employee, generous leave, vacation, and personal paid time-off, 12 paid company holidays a year, and flexible work hours to work-from-home.
In addition to healthy base wages, additional programs include annual bonus opportunities, 12 paid company holidays a year, healthcare and insurance benefits, including 100% paid health benefits for the employee, generous paid time off and family leave, family care resources and flexible work hours to work-from-home.
(“Cosmo”), Winglight Pacific, Ltd (“Winglight”) and Starlight Electronics Company Ltd (“SLE”), among others. Pursuant to the Redemption Agreement, neither koncepts nor Treasure Green remained shareholders of the Company and SLRD, SCE, Cosmo, Winglight and SLE are no longer related parties. Available Information The Company is incorporated under the laws of the State of Delaware and was formed in 1994.
Pursuant to the Redemption Agreement, neither koncepts nor Treasure Green remained stockholders of our company and SLRD, SCE, Cosmo, Winglight and SLE are no longer related parties. Reverse Stock Split and Nasdaq Listing On May 23, 2022, we effected a reverse stock split of our shares of common stock in a ratio of 1:30.
We are actively exploring renewing the license agreement and exploring new licensing opportunities. This product category accounted for approximately 3% of our net sales in our fiscal year ended March 31, 2022. Microphones and Accessories — we currently offer a line of traditional microphone accessories that are compatible with our karaoke machines.
We are currently in discussion with many automotive brands to offer our products. This product category is new and did not contribute to net sales in our fiscal year ended March 31, 2023.
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In our fiscal year ended March 31, 2021, revenues from four of these customers represented greater than 10% of net sales at a percentage of 36%, 20%, 13% and 12% of total net sales.
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The price to the public in the offering was $4.00 per share, before underwriting discounts and commissions. The offering closed on May 26, 2022. We received net proceeds of approximately $3.4 million.
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Regulatory Matters Each of our products is designed to comply with all applicable mandatory and voluntary safety standards.
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Pursuant to the terms of the Underwriting Agreement, we issued to the Underwriter warrants to purchase up to 100,000 shares of common stock, representing 10% of the shares sold in the offering, excluding any shares sold through the over-allotment option.
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To support the advancement of our employees, we offer training and development programs encouraging advancement from within. As of the filing of this report, we had 32 employees, 17 of which are located at our corporate office and 15 at our logistics center in Ontario, California.
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(“Ault Alliance”), formerly BitNile Holdings, Inc., a Delaware corporation, Ault Lending, LLC (“Ault Lending”), a California limited liability company and subsidiary of Ault Alliance, and Milton C.
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During peak shipping season, (July through December), we rely heavily on temporary labor at our logistics warehouse to handle the increased shipment volume. Environmental Issues We may be subject to legal and financial obligations under environmental, health and safety laws in the United States and in other jurisdictions where we operate.
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Ault, III (“Ault”), Founder and Executive Chairman of Ault Alliance (collectively the “Reporting Persons”) filed a joint Schedule 13D filing (the “Schedule 13D”) reporting that the Reporting Persons acquired, in the aggregate, 1,405,000 shares, or 52.8% of the issued and outstanding shares of our common stock, through open market purchases.
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We are not currently aware of any material environmental liabilities associated with any of our operations. Recent Developments Controlled Company Subsequent to March 31, 2022, and as of the date of this report, Digital Power Lending, LLC (“Digital Power Lending ”) beneficially owns and BitNile Holdings, Inc. (“BitNile Holdings”) and Milton C.
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As disclosed in the Schedule 13D, as amended and subsequent Section 16 filings, Ault Lending currently owns, and Ault Alliance and Ault may be deemed to beneficially own, an aggregate of 1,808,000 shares of common stock, or approximately 42.8% of the outstanding shares of common stock as of the date of this Annual Report.
Removed
Ault, III (“Ault,” and collectively with Digital Power Lending and BitNile Holdings, “BitNile”) may be deemed to beneficially own an aggregate of 1,568,849 shares of our common stock or approximately 52.0% of our outstanding shares. Digital Power Lending is a wholly owned subsidiary of BitNile Holdings. Mr. Ault is the Executive Chairman of BitNile Holdings.
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The reduction in beneficial ownership percentage was a result of us selling stock in our ATM Offering (as defined and discussed below), and not from any sales of our common stock by Ault Lending. Credit Facility On October 14, 2022, we and our wholly-owned subsidiary, SMC Logistics, Inc.
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As longs as BitNile continues to hold more than 50% of the voting power of our Company, we will be a “controlled company” as defined under Nasdaq Marketplace Rules.
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(“SMC”), entered into a Credit and Security Agreement (the “Credit Agreement”) with Fifth Third Bank, National Association, as Lender (“Fifth Third”). The Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15,000,000 decreased to $7,500,000 during the period of January 1 through July 31 of each year (the “Credit Facility”).
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For so long as we are a controlled company under Nasdaq Marketplace Rules, we are permitted to elect to rely on certain exemptions from corporate governance rules, including: ● an exemption from the rule that a majority of our board of directors must be independent directors; ● an exemption from the rule that the compensation of our CEO must be determined or recommended solely by independent directors; and ● an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.
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The Credit Agreement matures on October 14, 2025. The revolving Credit Facility bears interest of (a) the Prime Rate plus 0.50% or (b) the 30 day Term SOFR rate plus 3.00% (subject in each case to a floor of 0.50%), depending on the type of loan we request. “Term SOFR” means the forward-looking SOFR rate administered by CME Group, Inc.
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BitNile has indicated that it intends to appoint two directors to our Board of Directors.
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(or other administrator selected by Fifth Third) and published on the applicable Bloomberg LP screen page (or such other commercially available source providing such quotations as may be selected by Fifth Third), fixed by the administrator thereof two business days prior to the commencement of the applicable interest period (provided, however, that if Term SOFR is not published for such business day, then Term SOFR shall be determined by reference to the immediately preceding business day on which such rate is published), rounded upwards, if necessary, to the next 1/8th of 1% and adjusted for reserves if Fifth Third is required to maintain reserves with respect to the relevant loans.
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Upon the appointment of the BitNile nominees, our Board of Directors will increase in size to seven directors, of which less than a majority will be “independent” as defined under Nasdaq Marketplace Rules. 6 Reverse Stock Split and Nasdaq Listing On May 23, 2022, the Company effected a reverse stock split of its shares of common stock in a ratio of 1:30.
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We are required to pay an unused line fee of 0.35% per annum equal to the difference between (i) the maximum revolving loan limit then in effect and (ii) the average daily balance of the revolving loans for each month, which fee shall be fully earned by Fifth Third and payable monthly in arrears on the first business day of each month.
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We file reports with the Securities and Exchange Commission (“SEC”), including an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports that we file with, or furnish to, the SEC.
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Said fee shall be calculated on the basis of a 360 day year.
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The SEC maintains an Internet website, www.sec.gov , that contains reports, proxy and information statements and other information that we file electronically with the SEC.
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The Credit Agreement provides for an early termination fee of 2% if we prepay or terminate Fifth Third’s commitment to make loans under the Credit Agreement two or more years prior to the maturity or 0.5% if such prepayment occurs less than two year prior to the maturity or during any renewal period.
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The obligations under the Credit Agreement are secured by all of our assets and the assets of SMC, presently owned or later acquired, and all cash and non-cash proceeds thereof (including, without limitation, insurance proceeds).
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As of March 31, 2023, we were in default under the Credit Agreement due to non-compliance with the fixed charge coverage ratio covenant of 1:05 : 1.0. On May 19, 2023, we executed a Waiver and First Amendment agreement which provides for a waiver of previous defaults and new covenants that are required.
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We must comply monthly with minimum liquidity (defined as excess loan availability plus cash on hand) of $2.5 million between February and July and $4.0 million between September and June.
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We must also maintain pre-defined minimum operating cash flows between February and August 2023, until we achieve a fixed charge ratio of 1.15 : 1.0 beginning in September 2023 and throughout the remaining term of the Credit Agreement.
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ATM Offering On February 15, 2023, we entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Aegis Capital Corp, as sales agent (the “Agent”), pursuant to which we could offer and sell, from time to time, through the Agent (the “ATM Offering”), up to approximately $1.8 million in shares of its common stock.
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Shares offered and sold in the ATM Offering were issued pursuant to the registration statement on Form S-3 (File No. 333-269183) filed with the Securities and Exchange Commission (the “SEC”) on January 11, 2023 and declared effective by the SEC on January 20, 2023, and the prospectus supplement relating to the ATM Offering filed with the SEC on February 15, 2023.
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During the fiscal year ended March 31, 2023, we received total net proceeds from the ATM Offering of approximately $36,000 on sales of 14,230 shares of common stock at an average price of $2.56 per share.
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Through May 12, 2023, we received total net proceeds from the ATM Offering of approximately $1.7 million on sales of 1,052,770 shares of common stock at an average price of $1.64 per share. The Sales Agreement has been terminated. Our Product Portfolio Our products are sold directly to distributors and retail customers.
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On February 28, 2023, we renewed this license agreement for an additional three years. On March 16, 2023, we entered into a three-year license agreement with Sesame Street Workshop for its Sesame Street brand for karaoke and singalong toy products, effective January 1, 2023.
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Through this license agreement, we will be able to develop and offer for sale all the iconic and beloved Sesame Street characters like Elmo, Big Bird, Cookie Monster, Abby Cadabby, and many more. This product category accounted for less than 1% of our net sales in our fiscal year ended March 31, 2023.
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This product category accounted for approximately 20% of our net sales in our fiscal year ended March 31, 2023. Singing Machine Kids Youth Electronics — including the brand Singing Machine Kids. Our kids’ line of products offers fun music entertainment features designed specifically for children.
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Automotive — In January 2023, we announced at the Consumer Electronics Show that we will be entering the connected vehicle karaoke device market in partnership with Stingray Group, Inc. (“Stingray”). We have developed microphone hardware utilizing our PitchLab™ technology to offer integrated wireless microphones for connection with major automotive brand’s vehicles.
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On August 31, 2023, the lease at our Ontario, California warehouse facility will terminate.
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Our competitive strengths include our ability to develop innovative new products and features, speed to market, our relationships with major retailers, and the quality and pricing of our products. Intellectual Property We rely on a combination of word and design mark trademarks and trade secrets to protect our intellectual property.
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Human Capital Resources We are committed to attracting and retaining the brightest and best talent, so investing in human capital is critical to our success. The employee traits we value include industriousness, intellectual curiosity, growth mindset and deeply caring about the quality of work.
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The human capital measures and objectives that we focus on in managing our business include employee safety, talent acquisition and retention, employee engagement, development and training, diversity and inclusion, and compensation and pay equity.
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Employee Profile As of March 31, 2023, we had 37 employees, with 18 located at our corporate office, 12 at our logistics center in Ontario, California and 7 in our office in Hong Kong.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

49 edited+98 added−27 removed46 unchanged
Biggest changeEvents such as fire or other catastrophic events, any malfunction or disruption of our centralized information systems or shipping problems may result in delays or disruptions in the timely distribution of merchandise to our customers, which could substantially decrease our revenues and profitability. 11 WE MAY ENCOUNTER DIFFICULTIES ACCESSING CAPITAL We currently have an Intercreditor Revolving Credit Facility with Crestmark Bank for a $10.0 million facility (decreasing to $5.0 million in off-peak season) on eligible accounts receivable under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11.
Biggest changeEvents such as fire or other catastrophic events, any malfunction or disruption of our centralized information systems or shipping problems may result in delays or disruptions in the timely distribution of merchandise to our customers, which could substantially decrease our revenues and profitability. 12 OUR PRODUCTION COSTS MAY INCREASE IF WE ARE REQUIRED TO MAKE PURCHASES USING THE CHINESE YUAN INSTEAD OF THE U.S.
Our arrangements with these factories are subject to the risks of doing business abroad, such as import duties, trade restrictions, work stoppages, and foreign currency fluctuations, limitations on the repatriation of earnings and political instability, which could have an adverse impact on our business. Furthermore, we have limited control over the manufacturing processes.
Our arrangements with these factories are subject to the risks of doing business abroad, such as import duties, trade restrictions, work stoppages, and foreign currency fluctuations, limitations on the repatriation of earnings and political instability, which could have an adverse impact on our margins. Furthermore, we have limited control over the manufacturing processes.
We have historically offered co-op promotion incentives to our customers because it is standard practice in the retail industry. WE EXPERIENCE DIFFICULTY FORECASTING THE DEMAND FOR OUR KARAOKE PRODUCTS AND IF WE DO NOT ACCURATELY FORECAST DEMAND, OUR REVENUES, NET INCOME AND CASH FLOW MAY BE AFFECTED.
We have historically offered co-op promotion incentives to our customers because it is standard practice in the retail industry. 11 WE EXPERIENCE DIFFICULTY FORECASTING THE DEMAND FOR OUR KARAOKE PRODUCTS AND IF WE DO NOT ACCURATELY FORECAST DEMAND, OUR REVENUES, NET INCOME AND CASH FLOW MAY BE AFFECTED.
However, the exchange rate has been stable during our fiscal year ended March 31, 2022 and the associated exchange rates did not have a material impact on our financial results. Should the exchange rate between the Canadian and US Dollar become more volatile and sales to Canadian customers increase, there could be a material adverse effect on our business.
However, the exchange rate has been stable during our fiscal year ended March 31, 2023 and the associated exchange rates did not have a material impact on our financial results. Should the exchange rate between the Canadian and US Dollar become more volatile and sales to Canadian customers increase, there could be a material adverse effect on our business.
OUR PROFIT MARGIN MAY BE DECREASED DUE TO INCREASED PRICES OF RAW MATERIALS, SHIPPING COSTS AND COSTS ASSOCIATED WITH PRODUCTION. Fluctuation in the price of oil, electronic chip components and shipping costs have and will continue to affect the Company in connection with the sourcing and delivery of raw materials and services.
OUR PROFIT MARGIN MAY BE DECREASED DUE TO INCREASED PRICES OF RAW MATERIALS, SHIPPING COSTS AND COSTS ASSOCIATED WITH PRODUCTION. Fluctuation in the price of oil, electronic chip components and shipping costs have and will continue to affect us in connection with the sourcing and delivery of raw materials and services.
Because of intense competition in the karaoke industry in the United States during our fiscal year ended March 31, 2022, we expect that the intense pricing pressure in the low end of the market will continue in the karaoke market in the United States in our fiscal year ending March 31, 2023.
Because of intense competition in the karaoke industry in the United States during our fiscal year ended March 31, 2023, we expect that the intense pricing pressure in the low end of the market will continue in the karaoke market in the United States in our fiscal year ending March 31, 2024.
These issues are common to all companies in the same type of business and if the Company is not able to negotiate lower costs, reduce other expenses, or pass on some or all of these price increases to our customers, our profit margin may be decreased.
These issues are common to all companies in the same type of business and if we are not able to negotiate lower costs, reduce other expenses, or pass on some or all of these price increases to our customers, our profit margin may be decreased.
We are also subject to pressure from our customers regarding certain financial incentives, such as return credits or large cooperative (“co-op”) promotion incentives, which effectively reduce our net sales and profit. We gave co-op promotion incentives of approximately $1.7 million during our fiscal year ended March 31, 2022 and $2.0 million during our fiscal year ended March 31, 2021.
We are also subject to pressure from our customers regarding certain financial incentives, such as return credits or large cooperative (“co-op”) promotion incentives, which effectively reduce our net sales and profit. We gave co-op promotion incentives of approximately $2.3 million during our fiscal year ended March 31, 2023 and $1.7 million during our fiscal year ended March 31, 2022.
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED BY ANY NEGATIVE IMPACT ON THE GLOBAL ECONOMY AND CAPITAL MARKETS RESULTING FROM THE CONFLICT IN UKRAINE OR ANY OTHER GEOPOLITICAL TENSIONS.
GENERAL RISK FACTORS OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED BY ANY NEGATIVE IMPACT ON THE GLOBAL ECONOMY AND CAPITAL MARKETS RESULTING FROM THE CONFLICT IN UKRAINE OR ANY OTHER GEOPOLITICAL TENSIONS.
While the Company has not experienced any direct impact from the conflict in the Ukraine, the extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial and could adversely affect our operating results as they impact the global economy in the future.
While we have not experienced any direct impact from the conflict in the Ukraine, the extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial and could adversely affect our operating results as they impact the global economy in the future.
As such, we are subject to the risks and costs of carrying inventory during the time period between the placement of the order and the delivery date, which reduces our cash flow. As of March 31, 2022 we had approximately $14.2 million in inventory as compared to $5.5 million in inventory as of March 31, 2021.
As such, we are subject to the risks and costs of carrying inventory during the time period between the placement of the order and the delivery date, which reduces our cash flow. As of March 31, 2023, we had approximately $9.6 million in inventory as compared to $14.2 million in inventory as of March 31, 2022.
If we are unable to sell this inventory during fiscal 2023 at historical or greater margins, our cash flow for operations will be negatively impacted. WE ARE SUBJECT TO INSURANCE RISK OF LOSS FOR GOODS DAMAGED WHILE IN TRANSIT FROM THE MANUFACTURER TO THE CUSTOMER AND OUR WAREHOUSE.
If we are unable to sell excess inventory in the future at historical or greater margins, our cash flow for operations will be negatively impacted. WE ARE SUBJECT TO INSURANCE RISK OF LOSS FOR GOODS DAMAGED WHILE IN TRANSIT FROM THE MANUFACTURER TO THE CUSTOMER AND OUR WAREHOUSE.
Our customers returned goods valued at approximately $3.6 million or 7.5% of our net sales in our fiscal year ended March 31, 2022 and approximately $4.1 million or 9.1% of our net sales in our fiscal year ended March 31, 2021. The return of products is due to a variety of reasons including defective units, customers’ overstock and buyer’s remorse.
Our customers returned goods valued at approximately $5.0 million or 12.7% of our net sales in our fiscal year ended March 31, 2023 and approximately $3.6 million or 7.5% of our net sales in our fiscal year ended March 31, 2022. The return of products is due to a variety of reasons including defective units, customers’ overstock and buyer’s remorse.
Future issuances of shares of our common stock could depress the market price of our common stock and result in dilution to existing holders of our common stock.
FUTURE SECURITIES ISSUANCES COULD RESULT IN SIGNIFICANT DILUTION TO OUR STOCKHOLDERS AND IMPAIR THE MARKET PRICE OF OUR COMMON STOCK. Future issuances of shares of our common stock could depress the market price of our common stock and result in dilution to existing holders of our common stock.
In our fiscal year ended March 31, 2022, revenues from three of these customers represented greater than 10% of net sales at a percentage of 37%, 18%, and 17% of total net sales.
In our fiscal year ended March 31, 2023, revenues from two of these customers represented greater than 10% of net sales, at 48% and 21% of total net sales. In our fiscal year ended March 31, 2022, revenues from three of these customers represented greater than 10% of net sales, at 37%, 18%, and 17% of total net sales.
We rely on a few large customers to provide a substantial portion of our revenues. Sales to the Company’s top five customers together comprised approximately 90% of our net sales for both of our fiscal years ended March 31, 2022 and 2021.
We rely on a few large customers to provide a substantial portion of our revenues. Sales to our top five customers together comprised approximately 89% and 90% of our net sales for our fiscal years ended March 31, 2023 and 2022, respectively.
The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of COVID-19, including, among others, restrictions on manufacturing and the movement of employees in many regions of China during our fiscal year ended March 31, 2021 and continuing into fiscal 2022.
The COVID-19 pandemic resulted in significant governmental measures being implemented to control the spread of COVID-19, including, among others, restrictions on manufacturing and the movement of employees in many regions of China during our fiscal year ended March 31, 2021 most of which were gradually repealed during the fiscal year ended March 31, 2023.
There can be no assurances that we can obtain any new financing or that we will be able to successfully enter into any arrangements upon terms that are acceptable to the Company in the future.
There can be no assurances that we will remain in compliance with the new covenants or have the ability to obtain any new financing or that we will be able to successfully enter into any arrangements upon terms that are acceptable to us in the future.
For example, in 2021 and continuing into 2022, the United States has experienced a rapid increase in inflation levels of over 8.6%, which is now at a 40-year historic high. Such heightened inflationary levels may negatively impact consumer disposable income and discretionary spending and, in turn, reduce consumer demand for our products and increase our costs.
For example, in 2022 and continuing into 2023, the United States has experienced a rapid increase in inflation levels of approximately 6.5% year-over year in 2022 and approximately 4.0% year-over-year in 2023. Such heightened inflationary levels may negatively impact consumer disposable income and discretionary spending and, in turn, reduce consumer demand for our products and increase our costs.
RISK FACTORS Set forth below and elsewhere in this Annual Report on Form 10-K and in the other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report. 7 RISKS ASSOCIATED WITH OUR BUSINESS THE COVID-19 PANDEMIC HAS AFFECTED OUR BUSINESS IN MANY DIFFERENT WAYS, AND MAY AMPLIFY THE RISKS AND UNCERTAINTIES FACING OUR BUSINESS WHICH MAY IMPACT OUR BUSINESS AND FINANCIAL RESULTS.
ITEM 1A. RISK FACTORS Set forth below and elsewhere in this Annual Report on Form 10-K and in the other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report.
CHANGES IN GOVERNMENT REGULATIONS RELATING TO INTERNATIONAL TARIFFS COULD SIGNIFICANTLY REDUCE OUR REVENUES, PRODUCT COST AND PROFITABILITY. U.S. government administration and members of the U.S. Congress have made public statements indicating possible significant changes in U.S. trade policy and have taken certain actions that may impact U.S. trade, including imposing tariffs on certain goods imported into the United States.
Congress have made public statements indicating possible significant changes in U.S. trade policy and have taken certain actions that may impact U.S. trade, including imposing tariffs on certain goods imported into the United States.
OUR PRODUCTION COSTS MAY INCREASE IF WE ARE REQUIRED TO MAKE PURCHASES USING THE CHINESE YUAN INSTEAD OF THE U.S. DOLLAR. The majority of our products are currently manufactured in China. During the fiscal year ended March 31, 2022, the Chinese local currency had no material effect on the Company as all of our purchases are denominated in U.S. currency.
DOLLAR. The majority of our products are currently manufactured in China. During the fiscal year ended March 31, 2023, the Chinese local currency had no material effect on us as all of our purchases are denominated in U.S. currency.
To the extent our leading competitors reduce prices on their karaoke machines, we must remain flexible to reduce our prices. If we are forced to reduce our prices, it will result in lower margins and reduced profitability.
Conversely, if we opt not to match competitor’s price reductions we may lose market share, resulting in decreased volume and revenue. To the extent our leading competitors reduce prices on their karaoke machines, we must remain flexible to reduce our prices. If we are forced to reduce our prices, it will result in lower margins and reduced profitability.
These measures, however, may not provide adequate protection for our trade secrets, know-how or other confidential information. We seek to protect our proprietary information by, among other things, entering into confidentiality agreements with employees, consultants and other third parties.
We seek to protect our proprietary information by, among other things, entering into confidentiality agreements with employees, consultants and other third parties. These confidentiality agreements may not sufficiently safeguard our trade secrets and other confidential information and may not provide adequate remedies in the event of unauthorized use or disclosure of this information.
Because there is intense competition in the karaoke industry, we are subject to pricing pressure from our customers. Many of our customers have demanded that we lower our prices and threatened to buy our competitor’s products. If we do not meet our customer’s demands to lower our regular prices, we will not sell as many karaoke products.
Many of our customers have demanded that we lower our prices and threatened to buy our competitor’s products. If we do not meet our customers’ demands to lower our regular prices, we will not sell as many karaoke products.
We expect to see increased cost in our finished goods during fiscal year 2023 due to the significant increases in the price of oil, rising inflation, increased cost of trans-oceanic shipping, increased drayage costs, electronic component price increases and increases in the cost of labor related to regulations instituted in China which impact wages related to the cost of production.
We do not expect to see significant increased cost in our finished goods during fiscal year 2024 as increases in the price of oil, inflation, costs of trans-oceanic shipping, drayage costs, electronic component costs and increases in the cost of labor begin to stabilize.
In addition, we must compete with all the other existing forms of entertainment including, but not limited to: motion pictures, video arcade games, home video games, theme parks, nightclubs, television, prerecorded tapes, CD’s, and DVD’s and streaming video. IF WE ARE UNABLE TO DEVELOP NEW KARAOKE PRODUCTS, OUR REVENUES MAY NOT CONTINUE TO GROW.
In addition, we must compete with all the other existing forms of entertainment including, but not limited to: motion pictures, video arcade games, home video games, theme parks, nightclubs, television, prerecorded tapes, CD’s, and DVD’s and streaming video. HIGH INFLATION AND UNFAVORABLE ECONOMIC CONDITIONS COULD NEGATIVELY AFFECT OUR OPERATIONS AND RESULTS.
However, late delivery of key products for the holiday season due to global logistics issues resulted in lost sales and an increase in inventory of approximately $5.5 million greater than planned at the end of our fiscal year ended March 31, 2022.
The primary reason for the decrease in inventory was due to the sale of prior fiscal year excess inventory from late delivery of key products for the prior year’s holiday season due to global logistics issues that resulted in lost sales and an increase in inventory as of March 31, 2022 of approximately $5.5 million.
In addition, trade secrets or other confidential information could otherwise become known or be independently developed by others in a manner that could prevent legal recourse by us.
Enforcing a claim that a party illegally disclosed or misappropriated a trade secret or other proprietary information could be difficult, expensive and time-consuming and the outcome could be unpredictable. In addition, trade secrets or other confidential information could otherwise become known or be independently developed by others in a manner that could prevent legal recourse by us.
A substantial reduction in or termination of orders from any of our largest customers would decrease our revenues and cash flow. 8 WE ARE SUBJECT TO THE RISK THAT SOME OF OUR LARGE CUSTOMERS MAY RETURN KARAOKE PRODUCTS THAT THEY HAVE PURCHASED FROM US AND IF THIS HAPPENS, IT WOULD REDUCE OUR REVENUES AND PROFITABILITY.
WE ARE SUBJECT TO THE RISK THAT SOME OF OUR LARGE CUSTOMERS MAY RETURN KARAOKE PRODUCTS THAT THEY HAVE PURCHASED FROM US AND IF THIS HAPPENS, IT WOULD REDUCE OUR REVENUES AND PROFITABILITY. In our fiscal years ended March 31, 2023 and 2022, a number of our customers and distributors returned karaoke products that they had purchased from us.
If any of our customers were to increase the volume of their returned karaoke products to us, it would reduce our revenues and profitability. WE ARE SUBJECT TO PRESSURE FROM OUR CUSTOMERS RELATING TO PRICE REDUCTION AND FINANCIAL INCENTIVES AND IF WE ARE PRESSURED TO MAKE THESE CONCESSIONS TO OUR CUSTOMERS, IT WILL REDUCE OUR REVENUES AND PROFITABILITY.
WE ARE SUBJECT TO PRESSURE FROM OUR CUSTOMERS RELATING TO PRICE REDUCTION AND FINANCIAL INCENTIVES AND IF WE ARE PRESSURED TO MAKE THESE CONCESSIONS TO OUR CUSTOMERS, IT WILL REDUCE OUR REVENUES AND PROFITABILITY. Because there is intense competition in the karaoke industry, we are subject to pricing pressure from our customers.
Due the size of the claim, we have obtained insurance coverage for goods that are shipped direct import to our customers whose shipping terms are FOB shipping point and for goods in transit to our California warehouse however, certain exclusions have been added that may prevent insurance coverage of this type of incident in the future. 9 OUR BUSINESS IS SEASONAL AND THEREFORE OUR ANNUAL OPERATING RESULTS WILL DEPEND, IN LARGE PART, ON OUR SALES DURING THE RELATIVELY BRIEF HOLIDAY SEASON.
We have obtained insurance coverage for goods that are shipped direct import to our customers whose shipping terms are FOB shipping point and for goods in transit to our California warehouse however, certain exclusions have been added that may prevent insurance coverage of certain damaged incidents in the future.
While we have seen the easing of COVID-19 restrictions and the impact on our business, we cannot predict the impact of the resurgence of variants of COVID-19 and other factors affecting local and global economies, specifically China.
While we have seen the easing of COVID-19 restrictions and the impact on our business, we cannot predict the impact of the resurgence of variants of COVID-19 and other factors affecting local and global economies, specifically China. 10 WE DEPEND ON THIRD PARTY SUPPLIERS FOR PARTS FOR OUR KARAOKE MACHINES AND RELATED PRODUCTS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS WILL BE SEVERELY DAMAGED.
We currently rely on trade secret protection and non-disclosure agreements with our employees, consultants and third-parties to protect our confidential and proprietary information. If we do not protect our intellectual property and other confidential information adequately, competitors may be able to use our proprietary technologies and information and thereby erode any competitive advantages they provide us.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY WE PRIMARILY RELY ON TRADE SECRET PROTECTION AND NON-DISCLOSURE AGREEMENTS TO PROTECT OUR PROPRIETARY INFORMATION, WHICH MAY NOT BE EFFECTIVE. We currently rely on trade secret protection and non-disclosure agreements with our employees, consultants and third-parties to protect our confidential and proprietary information.
Deterioration in the financial condition of our customers could result in bad debt expense to us and have a material adverse effect on our revenues and future profitability. A DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTER IN CALIFORNIA COULD IMPACT OUR ABILITY TO DELIVER MERCHANDISE TO OUR CUSTOMERS, WHICH COULD ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.
Deterioration in the financial condition of our customers could result in bad debt expense to us and have a material adverse effect on our revenues and future profitability. 16 WE MAY HAVE TROUBLE HIRING ADDITIONAL QUALIFIED PERSONNEL.
Also, since we do not have written agreements with any of these factories, we are subject to additional uncertainty if the factories do not deliver products to us on a timely basis. 10 WE DEPEND ON THIRD PARTY SUPPLIERS FOR PARTS FOR OUR KARAOKE MACHINES AND RELATED PRODUCTS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS WILL BE SEVERELY DAMAGED.
Also, since we do not have written agreements with any of these factories, we are subject to additional uncertainty if the factories do not deliver products to us on a timely basis.
Additionally, other extraordinary events such as terrorist attacks or military engagements, which adversely affect the retail environment may restrict consumer spending and thereby adversely affect our sales growth and profitability. HIGH INFLATION AND UNFAVORABLE ECONOMIC CONDITIONS COULD NEGATIVELY AFFECT OUR OPERATIONS AND RESULTS.
Additionally, other extraordinary events such as terrorist attacks or military engagements, which adversely affect the retail environment may restrict consumer spending and thereby adversely affect our sales growth and profitability. A DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTER IN CALIFORNIA COULD IMPACT OUR ABILITY TO DELIVER MERCHANDISE TO OUR CUSTOMERS, WHICH COULD ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.
While we have taken measures to prevent a similar incident in the future, there can be no guarantee that this type of damage or other types of damage could occur in the future.
While we have taken significant measures to prevent damage incidents there can be no guarantee of damage incidents occurring in the future.
CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES. Purchases of karaoke machines and music are considered discretionary for consumers.
Sales in our second and third quarter, combined, accounted for approximately 62% and 81% of net sales in our fiscal years ended March 31, 2023 and, 2022, respectively. CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES. Purchases of karaoke machines and music are considered discretionary for consumers.
The primary reason for the 1.6 percentage point decrease in returns was due to a decrease in overstock returns from our major customers. Our factories charge customary repair and freight costs which increase our expenses and reduce profitability.
The primary reason for the 5.2% increase in returns was due to an increase in overstock returns from one major customer. Our factories charge customary repair and freight costs, which increase our expenses and reduce profitability. If any of our customers were to increase the volume of their returned karaoke products to us, it would reduce our revenues and profitability.
If any of our trade secrets or other confidential or proprietary information were disclosed or misappropriated or if any such information was independently developed by a competitor, our competitive position could be harmed and our business could suffer. 12 RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE FUTURE SECURITIES ISSUANCES COULD RESULT IN SIGNIFICANT DILUTION TO OUR STOCKHOLDERS AND IMPAIR THE MARKET PRICE OF OUR COMMON STOCK.
If any of our trade secrets or other confidential or proprietary information were disclosed or misappropriated or if any such information was independently developed by a competitor, our competitive position could be harmed and our business could suffer. WE MAY BE FORCED TO LITIGATE TO ENFORCE OR DEFEND OUR INTELLECTUAL PROPERTY RIGHTS, OR THE INTELLECTUAL PROPERTY RIGHTS OF OUR LICENSORS.
As a result, we have experienced longer delivery lead times and some unavailability of these components which have delayed delivery of some of our products. We have also experienced delays in delivery schedules due to new outbreaks of COVID-19 in Southern China that have forced temporary closures of some key shipping ports.
As a result, we have experienced longer delivery lead times and some unavailability of these components which delayed delivery of some of our products.
In our fiscal year ended March 31, 2021, revenues from four of these customers represented greater than 10% of net sales at a percentage of 36%, 20%, 13% and 12% of total net sales. We do not have long-term contractual arrangements with any of our customers and they can cancel their orders at any time prior to delivery.
We do not have long-term contractual arrangements with any of our customers and they can cancel their orders at any time prior to delivery. A substantial reduction in or termination of orders from any of our largest customers would decrease our revenues and cash flow.
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent these rights are effectively maintained as confidential. We expect to rely primarily on trade secret and contractual protections for our confidential and proprietary information and we have taken security measures we believe are appropriate to protect this information.
We expect to rely primarily on trade secret and contractual protections for our confidential and proprietary information and we have taken security measures we believe are appropriate to protect this information. These measures, however, may not provide adequate protection for our trade secrets, know-how or other confidential information.
BECAUSE CERTAIN OF OUR STOCKHOLDERS CONTROL A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK, THEY MAY HAVE EFFECTIVE CONTROL OVER ACTIONS REQUIRING STOCKHOLDER APPROVAL As of the date of this report, Digital Power Lending beneficially owns and BitNile Holdings and Ault may be deemed to beneficially own an aggregate of 1568,849 shares of our common stock or approximately 52.0% of our outstanding shares.
Furthermore, we may issue additional equity securities that could have rights senior to those of our common stock. BECAUSE CERTAIN OF OUR STOCKHOLDERS CONTROL A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK, THEY MAY HAVE EFFECTIVE CONTROL OVER ACTIONS REQUIRING STOCKHOLDER APPROVAL As of the date of this Annual Report, Ault Alliance, Ault Lending and Milton C.
In addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. WE HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY CASH DIVIDENDS IN THE FUTURE.
This increased volatility, coupled with depressed economic conditions, could have a depressing effect on the market price of our common stock. In addition, the securities markets have, from time to time, experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.
Our major competitors for karaoke machines and related products are Singsation®, Singtrix®, eKids®, Bonaok, Karaoke USA™, Ion® Audio, licensed property karaoke products and other consumer electronics companies. We believe that competition for karaoke machines is based primarily on price, product features, reputation, delivery times, and customer support.
IF WE ARE UNABLE TO COMPETE IN THE KARAOKE PRODUCTS CATEGORY, OUR REVENUES AND NET PROFITABILITY WILL BE REDUCED. Our major competitors for karaoke machines and related products are Singsation®, Singtrix®, eKids®, Bonaok, Karaoke USA™, Ion® Audio, licensed property karaoke products and other consumer electronics companies.
To the extent that we lower prices to attempt to enhance or retain market share, we may adversely impact our operating margins. Conversely, if we opt not to match competitor’s price reductions we may lose market share, resulting in decreased volume and revenue.
We believe that competition for karaoke machines is based primarily on price, product features, reputation, delivery times, and customer support. To the extent that we lower prices to attempt to enhance or retain market share, we may adversely impact our operating margins.
Subsequent to March 31, 2022 and as of the date of this report, Digital Power Lending beneficially owns and BitNile Holdings and Ault may be deemed to beneficially own an aggregate of 1,568,849 shares of our common stock or approximately 52.0% of our outstanding shares. Digital Power Lending is a wholly owned subsidiary of BitNile Holdings. Mr.
Ault, III may be deemed to beneficially own an aggregate of 1,808,000 shares of our common stock or approximately 42.8% of our outstanding shares.
Removed
The COVID-19 pandemic has significantly affected U.S. consumer shopping patterns and caused the health of the U.S. and world economy to deteriorate in fiscal year 2022. During our fiscal year ended March 31, 2022, demand for consumer electronics products including home based entertainment and toys remained strong.
Added
RISKS RELATED TO OUR COMPANY AND FINANCIAL CONDITION WE MAY ENCOUNTER DIFFICULTIES ACCESSING CAPITAL We currently have a three-year Credit with Fifth Third Bank for a $15.0 million facility (decreasing to $7.5 million in off-peak season) on eligible accounts receivable that matures on October 14, 2025 .
Removed
While many of the restrictions and measures initially implemented in response to the pandemic have since been softened or lifted in varying degrees in different locations around the world, and the manufacture and distribution of COVID-19 vaccines during calendar year 2021 and 2022 helped to initiate a recovery from the pandemic, the uncertainty regarding existing and new potential variants of COVID-19 and the success of any vaccines in respect thereof, may in the future cause a reduction in global economic activity or prompt, the re-imposition of certain restrictions and measures.
Added
The Credit Facility is subject to a termination fee an amount equal to (i) 2.00% of the facility amount if such prepayment occurs two years or more prior to the maturity date or (ii) 0.50% of the facility amount if such prepayment occurs less than two years, prior to the maturity date.
Removed
In addition, even if not required by governmental authorities, increases in COVID-19 cases, such as if a new variant emerges, may result in significantly reduced economic activity, which could impact our business and our financial results.
Added
As of March 31, 2023, we were in default under the Credit Agreement due to non-compliance with the fixed charge coverage ratio covenant of 1:05 : 1.0. On May 19, 2023, we executed a Waiver and First Amendment agreement which provides for a waiver of previous defaults and new covenants that are required.
Removed
The port closures have also led to a temporary shortage of shipping containers which have resulted in significant price increases due to increased demand.
Added
We must comply monthly with minimum liquidity (defined as excess loan availability plus cash on hand) of $2.5 million between February and July and $4.0 million between September and June.
Removed
In our fiscal years ended March 31, 2022 and 2021, a number of our customers and distributors returned karaoke products that they had purchased from us.
Added
We must also maintain pre-defined minimum operating cash flows between February and August 2023, until we achieve a fixed charge ratio of 1.15 : 1.0 beginning in September 2023 throughout the remaining term of the Credit Agreement.
Removed
The primary reasons for the increase in inventory is due to late delivery of key products for the holiday season due to global logistics issues resulting in lost sales and an increase in inventory as of March 31, 2022 of approximately $5.5 million with the remaining increase due to new product received and in-transit for a program with one major customer.
Added
As of the date of filing of this Annual Report, we are in compliance with the covenants specified in the Waiver and First Amendment agreement.
Removed
During our fiscal year ended March 31, 2020, a major customer received goods that were significantly water damaged due to excess moisture absorbed in pallets shipped by the factory resulting in a loss of approximately $2.4 million. We recovered approximately $2.3 million from our cargo insurance coverage during our fiscal year ended March 31, 2021.
Added
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS IN FURTHERANCE OF OUR BUSINESS PLAN. We incurred a net loss of approximately $4.6 million during the year ended March 31, 2023. If we are unable to achieve profitable operations, we may need to raise additional capital in order to fund our operations in furtherance of our business plan.
Removed
During our fiscal years ended March 31, 2022 and 2021 we also secured vendor invoice credits of approximately $0.3 million and $0.4 million, respectively, from the factory and factory’s representative that caused the damage.
Added
Any proposed financing may include shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, debt securities, units consisting of the foregoing securities, equity investments from strategic development partners or some combination of each.
Removed
Sales in our second and third quarter, combined, accounted for approximately 81% and 86% of net sales in our fiscal years ended March 31, 2022 and, 2021, respectively. IF WE ARE UNABLE TO COMPETE IN THE KARAOKE PRODUCTS CATEGORY, OUR REVENUES AND NET PROFITABILITY WILL BE REDUCED.
Added
Any additional equity financings may be financially dilutive to, and will be dilutive from an ownership perspective to, our stockholders, and such dilution may be significant based upon the size of such financing. Additionally, we cannot assure that such funding will be available on a timely basis, in needed quantities, or on terms favorable to us, if at all.
Removed
We also have a $2.5 million facility on eligible inventory with Iron Horse Credit that was to expire on June 11, 2022.
Added
WE ARE HEAVILY DEPENDENT ON OUR SENIOR MANAGEMENT, AND A LOSS OF A MEMBER OF OUR SENIOR MANAGEMENT TEAM COULD CAUSE OUR STOCK PRICE TO SUFFER .
Removed
However, absent any termination notice given by the Company to IHC, the current financing arrangement automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date.
Added
If we lose the services of Gary Atkinson, our Chief Executive Officer or Bernardo Melo, our Chief Revenue Officer, we may not be able to find appropriate replacements on a timely basis, and our business could be adversely affected. Messrs.
Removed
OUR SUCCESS DEPENDS LARGELY ON THE CONTINUED SERVICES OF OUR SENIOR MANAGEMENT TEAM AND CERTAIN KEY EMPLOYEES. We rely on our executive officers and key employees in the areas of business strategy, marketing, sales, services, and general and administrative functions.
Added
Atkinson and Melo have worked at our company for 15 and 20 years, respectively, and are primarily responsible for all of our day-to-day operations. Our existing operations and continued future development depend to a significant extent upon the performance and active participation of these individuals. Although we have entered into employment agreements with Messrs.
Removed
From time to time, there may be changes in our executive management team or key employees resulting from the hiring or departure of executives or key employees, which could disrupt our business. We do not maintain key-man insurance for any member of our senior management team or any other employee.
Added
Atkinson and Melo, we cannot guarantee that we will be successful in retaining the services of these individuals.
Removed
The loss of one or more of our executive officers or key employees could have a serious adverse effect on our business. WE PRIMARILY RELY ON TRADE SECRET PROTECTION AND NON-DISCLOSURE AGREEMENTS TO PROTECT OUR PROPRIETARY INFORMATION, WHICH MAY NOT BE EFFECTIVE.
Added
If we were to lose any of these individuals, we may not be able to find appropriate replacements on a timely basis and our financial condition and results of operations could be materially adversely affected. 9 RISKS RELATED TO THE DEVELOPMENT, MANUFACTURE AND SHIPPING OF OUR PRODUCTS IF WE ARE UNABLE TO DEVELOP NEW KARAOKE PRODUCTS, OUR REVENUES MAY NOT CONTINUE TO GROW.
Removed
These confidentiality agreements may not sufficiently safeguard our trade secrets and other confidential information and may not provide adequate remedies in the event of unauthorized use or disclosure of this information. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret or other proprietary information could be difficult, expensive and time-consuming and the outcome could be unpredictable.
Added
RISKS RELATED TO OUR BUSINESS AND INDUSTRY CHANGES IN GOVERNMENT REGULATIONS RELATING TO INTERNATIONAL TARIFFS COULD SIGNIFICANTLY REDUCE OUR REVENUES, PRODUCT COST AND PROFITABILITY. U.S. government administration and members of the U.S.
Removed
Furthermore, we may issue additional equity securities that could have rights senior to those of our common stock.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the term of the existing leases.
Biggest changeWe believe that our facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the term of the existing leases.
ITEM 2. PROPERTIES We entered into an operating lease agreement, effective October 1, 2017, for our 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 $9,700 per month, subject to annual adjustments.
ITEM 2. PROPERTIES We entered into an operating lease agreement, effective October 1, 2017, for our 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 $9,950 per month, subject to annual adjustments.
Removed
The base rent payment is approximately $67,300 per month with a 3% increase every 12 months for the remaining term of the extension. We believe that our facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance.
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We do not intend to renew the lease agreement and have signed a service agreement with a third-party logistics company to provide domestic and Canadian warehousing services, effective September 1, 2023. The base rent payment is approximately $69,300 for the remaining term of the lease.
Added
We entered into an operating lease agreement, effective October 15, 2022, for our administrative office located in Hong Kong where we lease approximately 1,890 square feet of office space. The lease expires on October 14, 2025. The base rent payment is approximately $4,900 per month for the entire term of the lease.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeMARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Through May 23, 2022, our common stock traded on the OTC Markets, Inc.’s OTCQX under the symbol “SMDM.” Effective March 24, 2022, our common stock began trading on the Nasdaq Capital Markets under the symbol “MICS.” Prior to May 24, 2022, the Company’s common stock traded on the OTCQX under the symbol “SMDM”.
Biggest changeMARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is listed on the Nasdaq Capital Markets under the symbol “MICS.” Prior to May 23, 2022, our common stock traded on the OTC Markets, Inc.’s OTCQX under the symbol “SMDM.” Record Holders As of July 12, 2023, based upon information received from our transfer agent, there were approximately 194 record holders of our outstanding common stock.
Removed
As of this filing, based upon information received from our transfer agent, there were approximately 184 record holders of our outstanding common stock.
Added
Recent Sales of Unregistered Securities None. Equity Compensation Information The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. ITEM 6. [RESERVED]
Removed
RECENT SALES OF UNREGISTERED SECURITIES COMMON STOCK ISSUANCES On May 17, 2021, the Company issued 667 shares of its common stock to a former member of the Board of Directors who exercised stock options at an average exercise price of $7.20 per share.
Removed
On August 20, 2021, the Company issued an aggregate of 575 shares of its common stock to its non-employee directors at $8.70 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2022.
Removed
On December 31, 2021, the Company issued an aggregate of 2,000 shares of its common stock to a member of the Board of Directors who exercised stock options at an average exercise price of $4.50 per share.
Removed
All of the above issuances and sales were deemed to be exempt under Rule 506 of Regulation D and/or Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities.
Removed
The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of the Singing Machine or executive officers of the Singing Machine, and transfer was restricted by the Singing Machine in accordance with the requirement of the Securities Act.
Removed
In addition to representations by the above-reference persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment.
Removed
Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS None. ITEM 6. [RESERVED]

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeItem 6. [Reserved] 15 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 21 Item 9A. Controls and Procedures 22 Item 9B.
Biggest changeItem 6. [Reserved] 20 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 Item 9A. Controls and Procedures 26 Item 9B.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeRESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company’s total revenues: For the Fiscal Years Ended March 31, 2022 March 31, 2021 Net Sales 100.0 % 100.0 % Cost of Sales 77.2 % 73.2 % Operating Expenses 22.6 % 23.7 % Operating Income 0.1 % 3.1 % Other Income, Net 0.4 % 2.5 % Income Before Income Tax (Provision) Benefit 5.0 % 5.6 % Income Tax (Provision) Benefit 0.1 % -1.0 % Net Income 0.4 % 4.6 % FISCAL YEAR ENDED MARCH 31, 2022 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2021 NET SALES Net sales for the year ended March 31, 2022 (“Fiscal 2022”) were approximately $47.5 million.
Biggest changeOur mission is to “create joy through music.” In order to deliver on this mission, we are focused on the following multi-prong approach: ● In the short-term, improve profitability by optimizing operations and continue to expand gross margins; and ● In the mid-to-long-term, continue to grow our global distribution and expand into new product categories that take advantage of our vast distribution relationships and sourcing abilities. 20 Results of Operations for the Fiscal Year Ended March 31, 2023 Compared With Fiscal Year Ended March 31, 2022 The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of our total revenues: For the Fiscal Years Ended March 31, 2023 March 31, 2022 Net Sales 100.0 % 100.0 % Cost of Sales 76.6 % 77.2 % Operating Expenses 32.8 % 22.7 % Operating (Loss) Income -9.4 % 0.1 % Other Income, Net 0.2 % 0.4 % (Loss) Income Before Income Tax Provision -9.2 % 0.5 % Income Tax Provision -2.6 % -0.1 % Net (Loss) Income -11.8 % 0.4 % Net Sales Net sales for the year ended March 31, 2023 (“Fiscal 2023”) were approximately $39.3 million.
Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section captioned “Risk Factors” included under Part I, Item 1A and elsewhere in this report.
Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section captioned “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report.
These decreases in cash used in operations were offset by an increase in amounts due from banks of approximately $4.5 million due to cash required to pay vendors for the additional inventory and an increase in accounts payable of approximately $2.5 million primarily due to new seasonal goods in-transit.
These decreases in cash used in operations were offset by an increase in amounts due from banks of approximately $4.5 million due to cash required to pay vendors for the additional inventory and an increase in accounts payable of approximately $3.2 million primarily due to new seasonal goods in-transit.
The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating our reported financial results included accounts receivable allowance for doubtful accounts, reserves on inventory, revenue recognition and reserve for sales returns and income taxes.
The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating our reported financial results included accounts receivable allowance for doubtful accounts, reserves on inventory, revenue recognition and reserve for sales returns and allowances and income taxes.
While exchange rates have been stable for several years, we cannot assure you that the exchange rate between the United States, Macau, Hong Kong and Canadian currencies will continue to be stable and exchange rate fluctuations may have a material effect on our business, financial condition or results of operations. 19 SEASONAL AND QUARTERLY RESULTS Historically, our operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year.
While exchange rates have been stable for several years, we cannot assure you that the exchange rate between the United States, Macau, Hong Kong and Canadian currencies will continue to be stable and exchange rate fluctuations may have a material effect on our business, financial condition or results of operations. 23 Seasonal and Quarterly Results Historically, our operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to view the Company from management’s perspective, considering items that would have a material impact on future operations.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to view our company from management’s perspective, considering items that would have a material impact on future operations.
The Company’s contracts with customers consist of one performance obligation (the sale of the Company’s products). 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.
Our contracts with customers consist of one performance obligation (the sale of our products). Our 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.
The following discussion summarizes the significant factors affecting our results of operations and financial condition as of and during the years ended March 31, 2022 and 2021 and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report.
The following discussion summarizes the significant factors affecting our results of operations and financial condition as of and during the years ended March 31, 2023 and 2022 and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report.
There was an increase in inventory of approximately $8.4 million of which approximately $3.7 million was additional inventory due to product that was delivered too late for seasonal shipments as a result of global logistics difficulties, approximately $3.3 million was new product purchased for one major customer that was in-transit with the remaining increase primarily due to CPK inventory to be re-launched during the upcoming fiscal year.
There was an increase in inventory of approximately $8.4 million, of which approximately $3.7 million was additional inventory due to products that were delivered too late for seasonal shipments as a result of global logistics difficulties, approximately $3.3 million was new products purchased for one major customer that were in-transit with the remaining increase primarily due to CPK inventory to be re-launched during the upcoming fiscal year.
We are subject to risks involved in the exchange rate between the Canadian and US dollar, however, even though the exchange rate has fluctuated between $1.23 to $1.29 CAD to the U.S.
We are subject to risks involved in the exchange rate between the Canadian and US dollar, however, even though the exchange rate has fluctuated between $1.29 to $1.35 CAD to the U.S.
During the next twelve-month period, we plan on financing our working capital needs primarily from: 1) Vendor financing – All our key vendors in China have agreed to manufacture on behalf of the Company without advanced payments and have extended payment terms to the Company.
During the next twelve-month period, we plan on financing our working capital needs primarily from: 1) Vendor financing – All our key vendors in China have agreed to manufacture on our behalf without advanced payments and have extended payment terms to us.
Dollar during peak selling and collection season in Fiscal 2022 sales volume sold in Canadian dollars was not significant and the associated exchange rates did not have a material impact on the Company’s financial results. Operating expenses of the Macau office are paid in either Hong Kong dollars or Macau Pataca (MOP).
Dollar during peak selling and collection season in Fiscal 2023 sales volume sold in Canadian dollars was not significant and the associated exchange rates did not have a material impact on our financial results. Operating expenses of the Macau office are paid in either Hong Kong dollars or Macau Pataca (MOP).
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.
Should business conditions deteriorate or any major customer default on its obligations to us, this allowance may need to be significantly increased, which would have a negative impact on operations.
Sales in our fiscal second and third quarter, combined, accounted for approximately 81% and 86% of net sales in Fiscal 2022 and Fiscal 2021, 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.
Sales in our fiscal second and third quarter, combined, accounted for approximately 62% and 81% of net sales in Fiscal 2023 and Fiscal 2022, 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.
ACCOUNTS RECEIVABLE AND COLLECTIBILITY The Singing Machine’s accounts receivable consist of amounts due from customers in the ordinary course of business. Accounts receivable are carried at cost, net of allowances for uncollectible amounts.
Accounts Receivable and Collectibility Our accounts receivable consist of amounts due from customers in the ordinary course of business. Accounts receivable are carried at cost, net of allowances for uncollectible amounts.
Provisions for losses are charged to operations in amounts sufficient to maintain an allowance for losses at a level considered adequate to cover probable losses inherent in the Company’s accounts receivable.
Provisions for losses are charged to operations in amounts sufficient to maintain an allowance for losses at a level considered adequate to cover probable losses inherent in our accounts receivable.
While the Company generally does not contractually provide for overstock returns, the Company does provide for variable consideration contingent upon the occurrence of uncertain future events. Variable consideration is estimated at the expected value or at the most likely amount depending on the type of consideration.
While we generally do not contractually provide for overstock returns, we do provide for variable consideration contingent upon the occurrence of uncertain future events. Variable consideration is estimated at the expected value or at the most likely amount depending on the type of consideration.
As these co-op promotion incentives are not a distinct good or service and the Company cannot reasonably estimate the fair value of the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers are recorded as a reduction to net sales.
As these co-op promotion incentives are not a distinct good or service and we cannot reasonably estimate the fair value of the benefit we receive from these arrangements, the cost of these allowances at the time they are offered to the customers are recorded as a reduction to net sales.
The Company determines revenue recognition utilizing the following five steps: (1) identification of the contract with a customer, (2) identification of the performance obligations in the contract (promised goods or services that are distinct), (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations, and (5) recognition of revenue when, or as, the Company transfers control of the product or service for each performance obligation.
We determine revenue recognition utilizing the following five steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract (promised goods or services that are distinct); (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations; and (5) recognition of revenue when, or as, we transfer control of the product or service for each performance obligation.
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 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.
Our allowance for doubtful accounts is based on management’s estimates of the creditworthiness of our customers, current economic conditions and historical information, and, in the opinion of management, is believed to be 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 and future expectations.
The Company recognizes revenue when control of the goods sold is transferred to the customer, in an amount, referred to as the transaction price, that reflects the consideration to which the Company is expected to be entitled in exchange for those goods.
We recognize revenue when control of the goods sold is transferred to the customer, in an amount, referred to as the transaction price, that reflects the consideration to which we are expected to be entitled in exchange for those goods.
INCOME TAX PROVISION Significant management judgment is required in developing our provisions for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets.
Income Tax Provision Significant management judgment is required in developing our provision for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and valuation allowances that are against deferred tax assets.
The increase of cash on hand of approximately $1.9 million was primarily due to approximately $4.0 million provided by financing activities and offset by approximately $2.0 million in net cash used in operating activities. As of March 31, 2022, our working capital was approximately $7.8 million.
The increase of cash on hand of approximately $0.6 million was primarily due to approximately $1.2 million provided by financing activities and offset by approximately $0.6 million in net cash used in operating and investing activities. As of March 31, 2023, our working capital was approximately $9.1 million.
For the fiscal years ended March 31, 2022 and 2021, co-op promotion incentives were approximately $1.7 million and $2.0 million, respectively. The Company disaggregates revenues by product line and 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 12 – SEGMENT INFORMATION).
For the fiscal years ended March 31, 2023 and 2022, co-op promotion incentives were approximately $2.3 million and $1.7 million, respectively. We disaggregate revenues by product line and major geographic region as most of its revenue is generated by the sales of karaoke hardware and we have no other material business segments (See NOTE 14 – SEGMENT INFORMATION).
The Company is subject to chargebacks from customers for co-op promotion incentives, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices.
We are subject to chargebacks from customers for co-op promotion incentives, defective returns, return freight and handling charges that are deducted from open invoices, charged against revenue, and reduce collectability of open invoices.
The closing of the transactions set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred back to the Company in consideration of a payment of approximately $7,200,000 to koncepts and Treasure Green.
The closing of the transactions set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred back to us in consideration of a payment of approximately $7.2 million to koncepts and Treasure Green. The Redeemed Shares were retired and returned as unissued authorized capital.
Cash used in investing activities for Fiscal 2022 and Fiscal 2021 was approximately $0.1 million and $0.2 million, respectively primarily for the purchase of molds and tooling for new karaoke models. Net cash provided by financing activities for Fiscal 2022 was approximately $4.0 million. We received loan proceeds from our inventory line of credit of approximately $2.4 million.
Cash used in investing activities for Fiscal 2023 and Fiscal 2022 was approximately $0.2 million and $0.1 million, respectively, primarily for the purchase of molds and tooling for new karaoke models. Net cash provided by financing activities for Fiscal 2023 was approximately $1.2 million, compared to cash provided by financing activities of approximately $4.0 million for Fiscal 2022.
In Fiscal 2022 we recognized an income tax provision of approximately $0.1 million compared to an income tax provision of approximately $0.5 million in Fiscal 2021. The Company’s effective tax rate for the fiscal year ended March 31, 2022 was approximately 20.0% as compared to 17.4% for Fiscal 2021.
In Fiscal 2023, we recognized an income tax provision of approximately $1.0 million, compared to an income tax provision of approximately $0.1 million in Fiscal 2022. Our effective tax rate for the fiscal year ended March 31, 2023 was approximately 28.6% as compared to 19.9% for Fiscal 2022.
RESERVES ON INVENTORIES The Singing Machine establishes a reserve on inventory based on the expected net realizable value of inventory on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost.
Reserves On Inventories We establish a reserve on inventory based on the expected net realizable value of inventory 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.
These financing activities were offset by a payment of $150,000 on the subordinated related party debt, with the remaining offset primarily due to payments made on scheduled installments on installment notes and finance leases. 18 In August 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional investors and a strategic investor for private placement of (i) 550,000 shares of its common stock (the “Shares”) together with common warrants to purchase up to 550,000 shares of common stock for an exercise price of $10.50 per share, and (ii) 561,111 pre-funded warrants (“Pre-Funded Warrants”) with each Pre-Funded Warrant exercisable for one share of common stock at an exercise price of $0.01 per share, together with Common Warrants to purchase up to 561,111 shares of common stock at an exercise price of $10.50 per share (the “Private Placement”).
In August 2021, we entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional investors and a strategic investor for private placement of (i) 550,000 shares of our common stock together with common warrants to purchase up to 550,000 shares of common stock for an exercise price of $10.50 per share, and (ii) 561,111 pre-funded warrants (“Pre-Funded Warrants”) with each Pre-Funded Warrant exercisable for one share of common stock at an exercise price of $0.01 per share, together with Common Warrants to purchase up to 561,111 shares of common stock at an exercise price of $10.50 per share (the “Private Placement”).
Management evaluates its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is not likely to be realized. On both March 31, 2022 and 2021, we had net deferred tax assets of approximately $0.9 million.
Management evaluates its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is not likely to be realized. As of March 31, 2023, management determined that a full valuation allowance was required.
The Company estimates variable consideration under our return allowance programs for goods returned from the customer for various reasons, whereby a sales return reserve is recorded based on historic return amounts, specific events as identified and management estimates.
We estimate variable consideration under our return allowance programs for goods returned from the customer for various reasons, whereby a sales return reserve is recorded based on historic return amounts, specific events as identified and management estimates. For the fiscal years ended March 31, 2023 and 2022, we received sales returns of approximately $5.0 million and $3.6 million, respectively.
During 2021 and continuing into 2022, the United States has experienced a rapid increase in inflation levels of over 8.6%, which is now at a 40-year historic high.
During 2022 and continuing into 2023, the United States has experienced a rapid increase in inflation levels of approximately 6.5% year-over year in 2022 and approximately 4.0% year-over-year in 2023.
For the fiscal year ended March 31, 2022 we secured vendor invoice credits of approximately $0.2 million from the manufacturer’s representative of the factory that caused the damage.
For the fiscal year ended March 31, 2022, we secured additional vendor invoice credits of approximately $0.2 million from vendors relating to the same damaged goods incident.
NET INCOME As a result of the foregoing, we had net income of approximately $0.2 million and $2.2 million for Fiscal 2022 and Fiscal 2021, respectively. 17 LIQUIDITY AND CAPITAL RESOURCES On March 31, 2022, we had cash on hand of approximately $2.3 million as compared to cash on hand of approximately $0.4 million on March 31, 2021.
Liquidity And Capital Resources On March 31, 2023, we had cash on hand of approximately $2.9 million as compared to cash on hand of approximately $2.3 million on March 31, 2022.
The Company believes that its cash on hand, working capital (net of cash), cash expected to be generated from its operating forecast, along with the availability of cash from its credit facilities, will be adequate to meet the Company’s liquidity requirements for at least twelve months from the filing of this annual report .
As of the date of filing this Annual Report, we are in compliance with the amended covenants and there is no outstanding balance on the Credit Facility. 22 We believe that our cash on hand (including proceeds from the ATM Offering), working capital (net of cash), cash expected to be generated from our operating forecast, along with the availability of cash from our Credit Facility, will be adequate to meet our liquidity requirements for at least twelve months from the filing of this Annual Report.
The terms with the factories are sufficient to cover the factory direct import sales which are expected to account for approximately 60% of the total revenues in the fiscal year ending March 31, 2023. 2) Credit Facility - We currently have an Intercreditor Revolving Credit Facility with Crestmark Bank for a $10.0 million facility (decreasing to $5.0 million in off-peak season) on eligible accounts receivable under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11.
The terms with the factories are sufficient to cover the factory direct import sales which are expected to account for approximately 50% of the total revenues in the fiscal year ending March 31, 2024; and 2) Credit Facility - We currently have a three-year revolving Credit Facility with Fifth Third Bank for a $15.0 million facility (decreasing to $7.5 million in off-peak season) on eligible accounts receivable and inventory which terminates on October 14, 2025.
For the fiscal year ended March 31, 2022 there were one-time gains of approximately $0.4 million for the forgiveness of the Paycheck Protection Program loan and a gain of approximately $0.4 million primarily from a vendor settling accounts payable related to a damaged goods incident that occurred in the fiscal year ended March 31, 2020.
During the fiscal year ended March 31, 2022, there was a one-time gain from the forgiveness of the Payroll Protection Plan loan of approximately $0.4 million and a gain from the settlement of accounts payable with one of our factories of $0.3 million for a previous year’s damaged goods incident.
On March 31, 2022 and 2021 the Company had inventory reserves of approximately $0.4 million and $0.6 million, respectively. REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”. All revenue is generated from contracts with customers.
Revenue Recognition And Reserve For Sales Returns and Allowances We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 606, “Revenue from Contracts with Customers”. All revenue is generated from contracts with customers.
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. 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.
In management’s opinion, adequate provisions for potential income taxes in the jurisdictions have been made. 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.
INCOME TAXES We operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. Because of the complex issues involved, any claims can require an extended period to resolve. In management’s opinion, adequate provisions for potential income taxes in the jurisdictions have been made.
Our reserves for sales returns were approximately $0.9 million and $1.0 million as of March 31, 2023 and 2022, respectively (See NOTE 18 – RESERVE FOR SALES RETURNS). Income Taxes We operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. Because of the complex issues involved, any claims can require an extended period to resolve.
The decrease in selling expenses of $0.4 million was offset by an increase in general and administrative expenses of approximately $0.2 million primarily due to an increase consultation and professional services associated with guidance in investor relations and planning of contemplated one-time capital transactions.
There was a decrease in selling expenses of approximately $0.1 million primarily due to the decrease in sales, offset by an increase of approximately $2.3 million in general and administrative expenses.
GROSS PROFIT Gross profit for Fiscal 2022 was approximately $10.8 million or 22.8% of total revenues compared to approximately $12.3 million or 26.8% of sales for Fiscal 2021, a decrease of approximately $1.5 million as compared to the same period in the prior year.
Gross Profit Gross profit for Fiscal 2023 was approximately $9.2 million, or 23.4% of total revenues, compared to approximately $10.8 million, or 22.8% of sales for Fiscal 2022, a decrease of approximately $1.6 million. The decrease in net sales accounted for approximately $1.9 million of the decrease, offset by an increase in gross profit margin of approximately $0.3 million.
The decrease in CPK sales as discussed above contributed approximately 3.0 margin points of the decrease. There was a gross profit margin increase of approximately 0.7 margin points due to a decrease in promotion incentives of approximately $0.2 million.
The increase was primarily due to the increase in operating expenses of approximately $2.2 million and a decrease in gross profit of approximately $1.6 million, as discussed above.
OTHER INCOME (EXPENSES) Other income (expenses), net decreased by approximately $1.0 million to approximately $0.2 in other income, net for the fiscal year ended March 31, 2022 compared to approximately $1.2 million in other income, net for the same period ended March 31, 2021.
There were inflationary expenses increases of approximately $0.1 million in our California warehouse operations with the remaining increase due to other expenses that have increased due to inflation. 21 Other Income (Expenses) Other income, net decreased by approximately $0.1 million, to approximately $0.1 million for the fiscal year ended March 31, 2023, compared to approximately $0.2 million for the fiscal year ended March 31, 2022.
These proceeds were offset by principal payments made on subordinated related party debt of $0.3 million and payments on financed leases and installment notes of approximately $0.1 million.
These financing activities were offset by a payment of approximately $0.2 million on the subordinated related party debt, with the remaining offset primarily due to payments made on scheduled installments on installment notes and finance leases.
The Redeemed Shares were retired and returned to the unissued authorized capital of the Company Net cash provided by financing activities for Fiscal 2021 was approximately $0.1 million. We received loan proceeds from Crestmark in the amount of approximately $0.4 million under the Paycheck Protection Program. We received additional proceeds from our inventory line of credit of approximately $0.1 million.
Net cash provided by financing activities for Fiscal 2022 was approximately $4.0 million. We received loan proceeds from our inventory line of credit of approximately $2.4 million. In August 2021, we received net proceeds of approximately $1.8 million from the execution of the securities purchase agreement and Redemption Agreement as discussed below.
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 consolidated statements of income as our underlying customer agreements are less than one year. 20 The Company selectively participates in a retailer’s co-op promotion incentives to maximize sales of the Company’s products on the retail floor or to assist in developing consumer awareness of new product launches, by providing marketing fund allowances to our customers.
Revenue is recorded in the amount of consideration we expect to receive for the sale of these goods. 24 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 consolidated statements of operations as our underlying customer agreements are less than one year.
This represents an increase of approximately $1.7 million as compared to approximately $45.8 million in the fiscal year ended March 31, 2021 (“Fiscal 2021”).
Operating Expenses During the fiscal year ended March 31, 2023, total operating expenses increased to approximately $12.9 million compared to approximately $10.7 million during the fiscal year ended March 31, 2022. This represents an increase in total operating expenses of approximately $2.2 million.
For the fiscal years ended March 31, 2022 and 2021 the Company received sales returns of approximately $3.6 million and $4.1 million, respectively. The return of products is due to a variety of reasons including defective units, customers’ overstock and buyer’s remorse.
The return of products is due to a variety of reasons including defective units, customers’ overstock and buyers’ remorse. The primary reason for the increase of approximately $1.4 million in returns was an increase in overstock returns from one major customer.
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.
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 our fiscal year beginning April 1, 2023 including interim periods within that fiscal year.
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 due to excess supply on-hand, slow-moving product and end-of-life product.
Management regularly reviews our investment in inventories for such declines in value due to excess supply on-hand, slow-moving product and end-of-life product. On March 31, 2023 and 2022, we had inventory reserves of approximately $0.9 million and $0.4 million, respectively.
If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized. OTHER ESTIMATES We make other estimates in the ordinary course of business relating to sales returns and allowances, warranty reserves, and reserves for promotional incentives.
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.
Historically, past changes to these estimates have not had a material impact on our financial condition. However, circumstances could change which may alter future expectations. RECENT ACCOUNTING PRONOUNCEMENTS In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326) .
Other Estimates We make other estimates in the ordinary course of business relating to sales returns and allowances, warranty reserves, and reserves for promotional incentives. Historically, past changes to these estimates have not had a material impact on our financial condition. However, circumstances could change which may alter future expectations.
INCOME BEFORE INCOME TAX PROVISION We had income before income tax provision of approximately $0.3 million in Fiscal 2022 compared to income before income tax provision of approximately $2.6 million in Fiscal 2021 for a total decrease in income before income tax provision of approximately $2.3 million.
These increases in other income were offset by interest expense of approximately $0.5 million during the fiscal year ended March 31, 2022. (Loss) Income Before Income Tax (Provision) We had a net loss before income tax provision of approximately $3.6 million in Fiscal 2023, compared to income before income tax provision of approximately $0.3 million in Fiscal 2022.
OPERATING EXPENSES During the fiscal year ended March 31, 2022, our operating expenses decreased from approximately $10.9 million to approximately $10.8 million, a decrease of approximately $0.2 million compared to the same period last year.
General and administrative expenses increased to approximately $9.2 million during the fiscal year ended March 31, 2023, compared to approximately $6.9 million during the fiscal year ended March 31, 2022, an increase of approximately $2.3 million.
The deferred tax assets on March 31, 2022 and 2021 were net of a valuation allowance of approximately $78,000 and approximately $23,000, respectively due to management’s belief that certain tax assets will more than likely expire prior to the Company’s these assets being realized.
On March 31, 2023 and 2022, we had net deferred tax assets of approximately $0.0 million and $0.9 million, respectively. The deferred tax assets on March 31, 2023 and 2022 were net of a valuation allowance of approximately $2.0 million and approximately $0.1 million, respectively.
This decrease was offset by the gross profit contribution of approximately $0.5 million due to the increase in net sales as explained above and a decrease in co-op promotions of approximately $0.2 million. 16 Gross profit margin for Fiscal 2022 was 22.8% compared to 26.8% for Fiscal 2021, a decrease of 4.0 margin points.
These increases in gross profit margin were offset by co-op promotion incentives that accounted for approximately $0.6 million, or 2.3%, of the gross margin decrease and an increase in inventory reserves contributing to approximately $0.8 million, or 2.2% of the gross margin decrease.
The amendments in ASU 2016-03 are effective for our fiscal year beginning April 1, 2023 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.
We adopted ASU 2016-03 on April 1, 2023, and the adoption did not have any material effect on our consolidated financial statements and related disclosures.
Removed
See also the section captioned “Disclosure on Forward-Looking Statements” in this report. 15 OVERVIEW Our primary objectives for the fiscal year ended March 31, 2022 (“Fiscal 2022”) were to: ● increase our revenues by expanding our product lines and customer base; ● maintain the general and administrative costs while increasing revenue; ● decrease ending inventory on hand; ● improve profitability; Revenues increased by approximately $1.7 million or approximately 3.7% primarily due to an increase in our two largest customers of approximately $4.2 million who increased the number of products offered offset by decreases in two of our top-five customers who experienced a decrease of approximately $2.5 million in sales of Carpool Karaoke (“CPK”) product.
Added
See also the section captioned “Disclosure on Forward-Looking Statements” in this report. Overview We are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings.
Removed
Gross profit margins decreased by approximately 4.0 margin points to 22.8% primarily due a decrease of approximately $3.1 million in sales of high margin yield CPK product which accounted for approximately 3.0 margin points of the decrease offset by reduction in co-op promotion incentives of approximately $0.2 million or approximately 0.7 points as several major customers did not offer their usual holiday campaigns due to supply issues caused by global logistics issues.
Added
We believe we are a leading global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children. Our products are among the most widely available karaoke products in the world.
Removed
The remaining decrease of approximately 1.7 points of gross margin was primarily due to unit cost increases to products from increases in raw materials and a significant increase in freight costs due to global logistics issues that were only partially passed on to customers.
Added
This represents a decrease of approximately $8.2 million from the approximately $47.5 million in the fiscal year ended March 31, 2022 (“Fiscal 2022”). We experienced a decrease in net sales to four of our five major customers in Fiscal 2023 compared to Fiscal 2022.
Removed
Operating expenses decreased approximately $0.1 million primarily due a decrease in royalties paid on CPK licensed product of approximately $0.3 million offset by an increase in general and administrative expenses of approximately $0.2 million primarily due to an increase consultation and professional services associated with guidance in investor relations and planning of contemplated one-time capital transactions.
Added
The decrease in net sales was largely due to two main factors: (1) our major customers began the holiday season with excess inventory that was held over from the previous year due to late delivery of shipments caused by significant supply chain issues experienced globally during the calendar year 2022; and (2) the news of economic recession, inflation, and interest rate hikes dampened customers’ expectations for the holiday season, which resulted in our customers taking a very risk-adverse approach to buying and carrying inventory for the 2022 holiday season.
Removed
Inventory on hand increased by approximately $8.7 million of which approximately $5.4 million was for late delivery of seasonal product due to global logistics difficulties during peak season.
Added
Most of our major customers either did not take some of the inventory they had committed to earlier in the year or required significant co-op promotion incentives on goods sold to assist in holiday inventory sell-through.
Removed
The remaining increase in inventory was primarily due to new products purchased by one major customer that partially shipped during the first quarter ended June 30, 2022 with the remaining scheduled to ship during the second quarter ending September 30 2022.
Added
Co-op promotion incentives for the fiscal year ended March 31, 2023 increased to approximately $2.3 million, or 6.0% of net sales, as compared to approximately $1.7 million, or 3.6% of net sales, for the fiscal year ended March 31, 2022.
Removed
Net income decreased by approximately $1.9 million primarily due to an approximately $1.5 million reduction in gross profit margin with the remaining decrease primarily due to reduced net one-time gains.
Added
Gross profit margin for Fiscal 2023 was 23.4%, compared to 22.8% for Fiscal 2022, an increase of 0.6%. There were increases in gross margin of approximately $1.7 million, or 5.1%, primarily due to increased pricing and lower landed product costs from significantly decreased costs of shipping containers compared to the previous year.
Removed
This increase was primarily due an increase in sales to our two largest customers of approximately $4.2 million who increased the number of products offered to its customers and offset by decreases in two of our top-five customers that experienced a decrease of approximately $2.5 million in sales of CPK product.
Added
There was an increase in legal, professional, investor relations and stock transfer costs of approximately $0.9 million primarily related to the Nasdaq up-listing, change in control issues, regulatory filings, Delaware franchise fees and arbitration settlement. in the amount of $30,000.
Removed
There was a decrease in our gross profit margin of approximately 4.0 margin points which accounted for approximately $2.2 million gross profit margin.
Added
There was an increase in compensation of approximately $0.5 million, primarily due to compensation for new members of the board of directors, and officers’ and employees’ incentive compensation, new hires as well as merit increases. There was compensation expense of $0.4 million related to a change of control and employment continuation agreement with the Chief Financial Officer.
Removed
The remaining 1.7 gross margin point decrease was primarily due to product cost increases in raw materials and a significant increase in freight costs due to global logistics issues that were only partially passed on to customers.
Added
There was an increase in travel expenses of approximately $0.3 million, which includes participation in trade shows which we had not attended since the beginning of COVID-19.
Removed
Selling expenses decreased by approximately $0.4 primarily due to decreased royalty expense of approximately $0.3 million commensurate with the decrease in CPK product sales as explained above. There was an increase in discretionary marketing expense of approximately $0.4 million which included approximately $0.1 million to upgrade our website and develop direct-to consumer business.

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