SINGING MACHINE CO INC - Quarter Report: 2009 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarter ended December 31, 2009

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ______.

Commission File Number 0 - 24968

THE SINGING MACHINE COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

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

6601 Lyons Road, Building A-7, Coconut Creek, FL 33073

(Address of principal executive offices)

(954) 596-1000

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller Reporting Company x

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

APPLICABLE ONLY TO ISSUES INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

CLASS	NUMBER OF SHARES OUTSTANDING

Common Stock, $0.01 par value	37,449,432 as of February 11, 2010

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES

INDEX

		Page No.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	Consolidated Balance Sheets – December 31, 2009(Unaudited) and
	March 31, 2009	3

	Consolidated Statements of Operations - Three
	months and nine months ended December 31, 2009 and 2008(Unaudited)	4

	Consolidated Statements of Cash Flows - Nine months
	ended December 31, 2009 and 2008 (Unaudited)	5

	Notes to Consolidated Financial Statements-
	December 31, 2009 (Unaudited)	6-13

Item 2.	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	14-18

Item 4T.	Controls and Procedures	18

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	18

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults Upon Senior Securities	19

Item 4.	Submission of Matters to a Vote of Security Holders	19

Item 5.	Other Information	19

Item 6.	Exhibits	19

SIGNATURES		20

The Singing Machine Company, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	December 31, 2009			March 31, 2009
	(Unaudited)			(Audited)
Assets
Current Assets
Cash	$	1,777,340		$	957,163
Accounts receivable, net of allowances of $289,659 and $261,980, respectively		2,677,848			972,345
Due from factor		280,484			73,854
Inventories,net		3,588,653			4,729,667
Prepaid expenses and other current assets		400,997			526,563
Total Current Assets		8,725,322			7,259,592

Property and equipment, net		778,323			886,770
Other non-current assets		179,751			179,362
Total Assets	$	9,683,396		$	8,325,724

Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable	$	2,733,828		$	2,588,769
Due to related parties, net		3,353,258			1,498,391
Accrued expenses		627,140			422,260
Short-term loan - bank		1,092,323			-
Current portion of long-term financing obligation		18,186			18,186
Customer credits on account		526,948			908,449
Deferred gross profit on estimated returns		351,940			288,039
Total Current Liabilities		8,703,623			5,724,094

Long-term financing obligation, less current portion		10,609			22,733
Total Liabilities		8,714,232			5,746,827

Shareholders' Equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock, Class A, $.01 par value; 100,000 shares authorized; no shares issued and outstanding		-			-
Common stock, $0.01 par value; 100,000,000 shares authorized; 37,449,432 and 37,449,432 shares issued and outstanding		374,494			374,494
Additional paid-in capital		19,084,721			19,075,750
Accumulated deficit		(18,490,051	)		(16,871,347	)
Total Shareholders' Equity		969,164			2,578,897
Total Liabilities and Shareholders' Equity	$	9,683,396		$	8,325,724

The accompanying notes are an integral part of these consolidated financial statements.

The Singing Machine Company, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For Three Months Ended						For Nine Months Ended
	December 31, 2009			December 31, 2008			December 31, 2009			December 31, 2008

Net Sales	$	11,975,761		$	16,611,566		$	19,781,141		$	30,998,308

Cost of Goods Sold		8,981,999			12,839,723			15,689,397			25,002,865

Gross Profit		2,993,762			3,771,843			4,091,744			5,995,443

Operating Expenses
Selling expenses		1,708,663			1,642,309			2,648,835			2,656,385
General and administrative expenses		875,864			1,436,477			2,666,471			3,355,232
Depreciation and amortization		120,682			121,604			322,947			326,264
Total Operating Expenses		2,705,209			3,200,390			5,638,253			6,337,881

Income (Loss) from Operations		288,553			571,453			(1,546,509	)		(342,438	)

Other Expenses
Interest expense		(41,244	)		(71,670	)		(72,195	)		(104,671	)

Income (Loss) before provision for income taxes		247,309			499,783			(1,618,704	)		(447,109	)

Provision for income taxes					(36,082	)					(36,082	)

Net Income (Loss)	$	247,309		$	463,701		$	(1,618,704	)	$	(483,191	)

Net Income (Loss) per Common Share
Basic and Diluted	$	0.01		$	0.01		$	(0.04	)	$	(0.01	)

Weighted Average Common and Common Equivalent Shares:
Basic and Diluted		37,449,432			32,729,990			37,449,432			32,472,073

The accompanying notes are an integral part of these consolidated financial statements.

The Singing Machine Company, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For Nine Months Ended
	December 31, 2009			December 31, 2008

Cash flows from operating activities
Net Loss	$	(1,618,704	)	$	(483,191	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation and amortization		322,947			326,264
Inventory reserve charge		91,330			95,149
Change in allowance for bad debts		27,679			236,267
Stock based compensation		8,971			28,890
Deferred gross profit on estimated sales returns		63,901			261,285
Changes in assets and liabilities:
(Increase) Decrease in:
Accounts receivable		(3,502,013	)		(6,710,288	)
Inventories		1,049,684			(2,598,292	)
Prepaid expenses and other current assets		125,566			16,506
Other non-current assets		(388	)		(8,958	)
Increase (Decrease) in:
Accounts payable		145,059			5,476,800
Accounts payable - related party		1,558,187			2,449,709
Accrued expenses		204,880			187,123
Customer credits on account		(381,501	)		(199,027	)
Net cash used in operating activities		(1,904,402	)		(921,763	)
Cash flows from investing activities
Purchase of property and equipment		(216,148	)		(720,150	)
Disposal of property and equipment		1,648			-
Net cash used in investing activities		(214,500	)		(720,150	)
Cash flows from financing activities
Borrowings from factor, net		(206,630	)		(916,496	)
Net proceeds pursuant to factoring facility		1,768,830			4,159,414
Net proceeds from short-term bank loan		1,092,323			-
Payments on long-term financing obligation		(12,124	)		46,980
Net loan proceeds from related parties		296,680			(296,650	)
Net cash provided by financing activities		2,939,079			2,993,248
Change in cash and cash equivalents		820,177			1,351,335

Cash and cash equivalents at beginning of period		957,163			447,816
Cash and cash equivalents at end of period	$	1,777,340		$	1,799,151

Supplemental Disclosures of Cash Flow Information:
Cash paid for Interest	$	72,195		$	103,183
Cash paid for Income Taxes		-			36,802
Non-Cash Financing Activities:
Conversion of trade payable to equity	$	-		$	197,500

The accompanying notes are an integral part of these consolidated financial statements.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2009

NOTE 1 – BASIS OF PRESENTATION

OVERVIEW

The Singing Machine Company, Inc., a Delaware corporation (the "Company," “SMC”, "The Singing Machine", “we” or “us”), and wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”), SMC-Music, Inc.(“SMC-M”), and Singing Machine Holdings Ltd. (a B.V.I. company) are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories, musical instruments and musical recordings. The products are sold directly to distributors and retail customers.

The preparation of The Singing Machine's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the Company's financial statements. Management evaluates its estimates and assumptions continually. These estimates and assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances.

NOTE 2-SUMMARY OF ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company, Macau Subsidiary, SMC-L, SMC-M and The Singing Machine Holdings Ltd. (a B.V.I. company). All inter-company accounts and transactions have been eliminated in consolidation for all periods presented.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements for the three months and nine months ended December 31, 2009 and 2008 are unaudited. In the opinion of management, such consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. The consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet information as of March 31, 2009 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. The interim consolidated financial statements should be read in conjunction with that report.

USE OF ESTIMATES

The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, inventory reserves, warranty reserves, and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Historically, past changes to these estimates have not had a material impact on the Company's financial condition. However, circumstances could change which may alter future expectations.

COLLECTIBILITY OF ACCOUNTS RECEIVABLE

The Singing Machine's allowance for doubtful accounts is based on management's estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be 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. 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.

ACCOUNTS RECEIVABLE FACTORING

The Company’s factoring facility only finances non-recourse accounts receivable. Such receivables are considered to have been sold in accordance with Financial Accounting Standard Board (“FASB”), Accounting Standard Codification (“ASC”) 860-30 Transfers and Servicing Secured Borrowing and Collateral. Accordingly, advances received pursuant to the factoring facility have been netted against the accounts receivable on the accompanying Consolidated Balance Sheets.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Macau Subsidiary is the Hong Kong dollar. Such financial statements are translated to U.S. dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions and translations were not material during the periods presented.

CONCENTRATION OF CREDIT RISK

The Company maintains cash balances in foreign financial institutions. The amounts at December 31, 2009 and March 31, 2009 are $1,500,528 and $666,643, respectively. At times the Company maintains cash in United States bank accounts that are in excess of the Federal Deposit Insurance Corporation (“FDIC”) insured amounts of up to $250,000. As of December 31, 2009 and March 31, 2009 the amounts uninsured in United States banks was $0 and $1,438, respectively.

INVENTORY

Inventories are comprised of electronic karaoke equipment, accessories, electronic musical instruments, electronic toys and compact discs and are stated at the lower of cost or market, as determined using the first in, first out method. The Singing Machine reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company's investment in inventories for such declines in value.

REVENUE RECOGNITION

Revenue from the sale of equipment, accessories, and musical recordings are recognized upon the later of: (a) the time of shipment or (b) when title passes to the customers and all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenues from sales of consigned inventory are recognized upon sale of the product by the consignee. Net sales are comprised of gross sales net of actual and estimated future returns, discounts and volume rebates.

STOCK BASED COMPENSATION

The Company began to apply the provisions FASB ASC 718-20, Compensation – Stock Compensation Awards Classified as Equity starting on January 1, 2006. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the consolidated statement of operations over the service period (generally the vesting period). Upon adoption, the Company transitioned to ASC 718-20 using the modified prospective application, whereby compensation cost is only recognized in the consolidated statements of operations beginning with the first period that ASC 718-20 is effective and thereafter, with prior periods' stock-based compensation still presented on a pro forma basis. Under the modified prospective approach, the provisions of ASC 718-20 are to be applied to new employee awards and to employee awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of employee awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the requisite service is rendered on or after the required effective date. The compensation cost for that portion of employee awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro-forma disclosures under ASC 718-20 The Company continues to use the Black-Scholes option valuation model to value stock options. For the three and nine months ended December 31, 2009, the stock option expense was $1,032 and $8,971, respectively. For the three and nine months ended December 31, 2008, the stock option expense was $6,608 and $13,888, respectively. Employee stock option compensation expense in fiscal years 2010 and 2009 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award.

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the assumptions outlined below. For the quarter ended December 31, 2009, the Company took into consideration guidance under ASC 718-20 and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. Previously such assumptions were determined based on historical data.

For the nine months ended December 31, 2009: expected dividend yield 0%, risk-free interest rate of 0.57% to 1.41%, volatility 70.22% and 80.07% and expected term of one year.

For the nine months ended December 31, 2008: expected dividend yield 0%, risk-free interest rate of 2.27%, volatility of 70.22% and expected term of one year.

ADVERTISING

Costs incurred for producing and publishing advertising of the Company are charged to operations as incurred. The Company has entered into cooperative advertising agreements with its major clients that specifically indicated that the client has to spend the cooperative advertising fund upon the occurrence of mutually agreed events. The percentage of the cooperative advertising allowance ranges from 2% to 5% of the purchase. The clients have to advertise the Company's products in the client's catalog, local newspaper and other advertising media. The client must submit the proof of the performance (such as a copy of the advertising showing the Company’s products) to the Company to request for the allowance. The client does not have the ability to spend the allowance at their discretion. The Company believes that the identifiable benefit from the cooperative advertising program and the fair value of the advertising benefit is equal or greater than the cooperative advertising expense. Advertising expense for the nine months ended December 31, 2009 and 2008 was $735,094 and $456,334, respectively.

RESEARCH AND DEVELOPMENT COSTS

All research and development costs are charged to results of operations as incurred. These expenses are shown as a component of selling, general and administrative expenses in the consolidated statements of operations. For the three months ended December 31, 2009 and 2008, these amounts totaled $5,385 and $28,241, respectively. For the nine months ended December 31, 2009 and 2008, these amounts totaled $45,146 and $34,895, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The carrying amounts of the Company's short-term financial instruments, including accounts receivable, due from factors, accounts payable, customer credits on account, accrued expenses and loans payable to related parties approximates fair value due to the relatively short period to maturity for these instruments.

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform to the current period presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

Beginning with the quarter ended June 30, 2009 we adopted the provisions of FASB ASC 855, Subsequent Events (“ASC 855”). The purpose of ASC 855 is to establish a general standard of accounting for the disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The statement outlines the following:

The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements

The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements

The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

ASC 855 was effective for interim and annual periods ending after June 15, 2009. The adoption of ASC 855 did not have any impact on our consolidated financial statements.

NOTE 3- INCOME TAXES

The Company follows FASB ASC 740-10-25 in Accounting for Uncertainty in Income Taxes. ASC 740 defines a recognition threshold and measurement attribute for financial statement recognition and measurements of tax positions taken or expected to be taken in a tax return. As of December 31, 2009 this position did not result in any adjustment to the Company’s provision for income taxes.

As of December 31, 2009 the Company is subject to U.S. Federal income tax examinations for the tax years ended March 31, 2007 through March 31, 2009.

As of December 31, 2009 and March 31, 2009, The Singing Machine had gross deferred tax assets of approximately $3.7 million and $3.1 million, respectively, against which the Company recorded valuation allowances totaling approximately $3.7 million and $3.1 million, respectively.

NOTE 4- INVENTORIES

Inventories are comprised of the following components:

	December 31,			March 31,
	2009			2009
	(unaudited)

Finished Goods	$	4,281,516		$	5,475,056
Inventory in Transit		143,856			-
Less: Inventory Reserve		(836,719	)		(745,389	)

Net Inventories	$	3,588,653		$	4,729,667

Inventory consigned to customers at December, 2009 and March 31, 2009 were $353,557 and $352,214, respectively.

During the third quarter ended December 31, 2009 the Company recognized an inventory impairment charge of $237,121 reflecting the liquidation of certain return inventory net of proceeds received from the parties to which it was sold. During the first quarter ended June 30, 2009 the Company recognized an inventory impairment charge of $181,142 to adjust certain Bratz licensed products and musical instruments to lower of cost or market value to accommodate large discounted sales and potential sales in subsequent periods.

NOTE 5 - ACCOUNTS RECEIVABLE FACTORING FACILITY

On August 28, 2008, the Company executed a three-party Banking Facility agreement between the Company’s wholly owned subsidiary SMC (Commercial Offshore De Macau) Limitada (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and Branch Banking and Trust Company (“BB&T” or “Factor”). The agreement is comprised of three facilities including a maximum of $7.0 million on 80% of qualified accounts receivable, a maximum letter of credit facility of $4.0 million for accounts payable financing and a maximum of $2.0 million for the negotiation of export bills under letter of credit.

According to the factoring facility, BB&T will serve as the correspondent factor for the Lender and does not advance funds to the Company directly. The Company assigns the proceeds from customers to the Lender and the Lender advances funds to the Borrower. The maximum amount for the advance is approximately $7.0 million or 80% of the qualified accounts receivable, which ever is higher. The Factor assumes credit risk on approved accounts (factor risk accounts). For non-approved accounts, the Company will assume the credit risk (client risk accounts). The factoring fees are .675% of the gross invoice for both client risk (recourse) and factor risk (non-recourse) accounts. As of December 31, 2009 there was a total of $8,343,662 of open accounts receivable assigned to the Factor. The Company assumed credit risk (recourse) in the amount of $272,072. Credit risk on the remaining factor assigned receivables in the amount of $8,071,591 was assumed by the Factor (non-recourse). This agreement was effective October 16, 2008 and replaces a previous four-party agreement between the Company, Starlight Marketing Limited (a related party), Standard Chartered Bank (Hong Kong), Limited and CIT (“Old Factor”). As of December 31, 2009 and March 31, 2009 the outstanding amount under the factoring facility with DBS Bank was $5,333,982 and $799,112, respectively. This amount represents advances made by the Bank on non-recourse receivables and have been offset against accounts receivable in the accompanying Consolidated Balance Sheets. The terms of the agreement are more particularly described in Note 8.

NOTE 6 - PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

	USEFUL	December 31,			March 31,
	LIFE	2009			2009
		(unaudited)

Computer and office equipment	5 years	$	660,948		$	652,235
Furniture and fixtures	5-7 years		217,875			220,315
Leasehold improvements	*		151,503			153,993
Warehouse equipment	7 years		101,521			86,599
Molds and tooling	3 years		1,744,979			1,552,465
			2,876,826			2,665,607

Less: Accumulated depreciation			(2,098,503	)		(1,778,837	)
		$	778,323		$	886,770

* Shorter of remaining term of lease or useful life

NOTE 7 - CUSTOMER CREDITS ON ACCOUNT

Customer credits on account represent customers that have received credits in excess of their accounts receivable balance. These balances were reclassified for financial statement purposes as current liabilities until paid or applied to future purchases.

NOTE 8 – FINANCING

On February 12, 2008 the Macau Subsidiary entered into a Banking Facilities agreement with Heng Seng Bank Limited (“Bank”). Under the terms of the agreement, the Macau Subsidiary had access to $5,100,000 in total facilities including $500,000 for payment of goods financed under the bank’s letters of credit, $3,000,000 for negotiation of discrepant documents presented under export letters of credit and a factoring facility to a maximum of $1,600,000. Interest on open balances was due and payable monthly at a rate of 2% per annum above LIBOR (London Interbank Offered Rate). The amounts borrowed were collateralized by a promissory note from the Macau Subsidiary of $5.8 million and an unlimited written guarantee from the Company. There were no amounts due to the Bank as of December 31, 2009 and March 31, 2009, respectively. In July 2009 the Bank informed the Company that these facilities have been rescinded effective immediately.

On July 16, 2008 SMC-L entered into a financing arrangement with Westover Financial, Inc. for the purchase of four forklifts for the California logistics operations. The terms of the agreement required an initial payment of $18,691 and 36 monthly payments of $1,516. On December 31, 2009 the remaining amount due on this obligation was $28,795 of which $18,186 is due within the next twelve months and the remaining $10,609 due after one year.

On August 28, 2008, the Company executed a three-party Banking Facility agreement between the Macau Subsidiary (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and BB&T (“Factor”). The agreement provides for credit facilities to a maximum of $13.0 million consisting of the following:

Maximum of $7.0 million on 80% of qualified accounts receivable.

Maximum letter of credit facility of $4.0 million for accounts payable financing.

Maximum $2.0 million negotiation of export bills under letter of credit.

Interest on letter of credit facilities and discounting charges on accounts receivable advances will be charged at a rate of 1.5% per annum over LIBOR (London Interbank Offered Rate). The credit facility is secured with corporate guarantees from the Company as well as a $2.0 million guarantee from Starlight International Holdings Limited, a related party (“Starlight”). BB&T will serve as the correspondent factor for the Lender for the Company’s qualified North American accounts receivable. BB&T does not advance funds to the Company directly. The Company assigns the proceeds from customers to the Lender and the Lender advances funds to the Borrower. The combined factoring fees will be .675% of the gross invoice for all factored accounts. This agreement is effective October 16, 2008 and replaces the previous four-party agreement between the Company, Starlight, Standard Chartered Bank (Hong Kong), Limited and CIT (“Old Factor”).

As of December 31, 2009 and March 31, 2009 the outstanding amount due from factors was $280,484 and $73,854, respectively. The amounts represent excess of customer payments received over amounts borrowed. As of December 31, 2009 and March 31, 2009 the outstanding amount due to DBS Bank was $5,333,982 and $799,112, respectively pursuant to the factoring facility. The amount has been offset against accounts receivable in the accompanying consolidated balance sheet.

During the period ended December 31, 2009, the Company obtained short term bank financing from DBS Bank in the amount of $1,092,323 pursuant to an accounts payable financing facility. The proceeds were used to pay China manufacturing vendors. The accounts payable facility loans are secured with corporate guarantees from the Company as well as a guarantee from Starlight and bear interest between .83% and 1.76%. The loan for the negotiation of export bills is secured by letters of credit from our customers. The amounts are due to DBS Bank as follows:

Amount		Due Date	Interest Rate
$	407,552	5-Jan-10		0.83	%
$	88,284	23-Feb-10		1.76	%
$	50,085	9-Mar-10		1.76	%
$	219,601	15-Mar-10		1.76	%
$	96,957	15-Mar-10		1.76	%
$	135,626	29-Mar-10		1.76	%
$	53,134	29-Mar-10		1.76	%
$	41,084	30-Mar-10		1.76	%
$	1,092,323

NOTE 9 - COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

There is currently no pending litigation against the Company, however the Company may be subject to various legal proceedings and other claims that arise in the ordinary course of business.

INCOME TAXES

In a letter dated July 21, 2008 the Internal Revenue Service (“IRS”) notified the former foreign subsidiary of an unpaid tax balance on Income Tax Return of a Foreign Corporation (Form 1120-F) for the period ending March 31, 2003 for International SMC (HK) Limited (“ISMC (HK)”), a former subsidiary. According to the notice ISMC (HK) has an unpaid balance due in the amount of $241,639 that includes an interest assessment of $74,125. ISMC (HK) was sold in its entirety by the Company on September 25, 2006 to a British Virgin Islands company (“Purchaser”). The sale and purchase agreement with the Purchaser of ISMC (HK) specifies that the Purchaser would ultimately be responsible for any liabilities, including tax matters. On June 3, 2009 the IRS filed a federal tax lien in the amount of approximately $170,000 against ISMC (HK) under ISMC (HK)’s federal Tax ID. Management sought independent legal counsel to assess the potential liability, if any, on the Company. In a memorandum from independent counsel, the conclusion based on the facts presented was that the IRS would not prevail against the Company for collection of the ISMC (HK) income tax liability based on:

The Internal Revenue Service’s asserted position that the Company is not the taxpayer.

The 1120- F tax liability was recorded under the taxpayer identification number belonging to ISMC (HK) and not the Company’s taxpayer identification number

The IRS would be barred from recovery since it failed to assess or issue a notice of levy within the three year statute of limitations

Based on the conclusion reached in the legal memorandum, management does not believe that the Company will have any liability with regards to this issue.

LEASES

The Company has entered into various operating lease agreements for office and warehouse facilities in Coconut Creek, Florida and City of Industry, California. The leases expire at varying dates. Rent expense for the nine months ended December 31, 2009 and 2008 was $660,579 and $656,822, respectively.

In addition, the Company maintains various warehouse equipment and computer equipment operating leases.

Future minimum lease payments under property and equipment leases with terms exceeding one year as of December 31, 2009 are as follows:

	Property Leases		Equipment Leases
For period ending December 31,

2010	$	346,090	$	6,851
2011		636,476		847
2012		655,570		-
2013		560,469		-
	$	2,198,605	$	7,698

LICENSE AGREEMENTS

On May 10, 2006, we entered into a two-year license agreement with MGA Entertainment, Inc. to produce and distribute a variety of karaoke products based on MGA's BRATZ™ franchise, one of the world's leading toy lines and girls' lifestyle brands, in North America, Europe and Australia. These karaoke products include a TFT DVD karaoke system, sing-a-long cassette players, deluxe microphones, electronic keyboards and an electronic drum. The license agreement contains a minimum guarantee payment term.

On November 21, 2006 we also entered into a three-year license agreement with MGA Entertainment, Inc. to produce and distribute a variety of consumer electronic products based on MGA's BRATZ™ franchise, one of the world's leading toy lines and girls' lifestyle brands, in North America, New Zealand, Chile and Australia. These consumer electronic products include boom boxes, clock radios and portable DVDs. The license agreement contains a minimum guarantee payment term.

As of December 31, 2009 the total amount due to MGA Entertainment, Inc. was $431,425. This amount includes $189,426 of additional royalties due and is included in accrued expenses on the accompanying Consolidated Balance Sheets. In addition the Company owes MGA Entertainment, Inc. $242,000 for guaranteed minimum advances due by December 31, 2008. This amount has not been included in the consolidated financial statements since it would be considered a “gross-up” of the balance sheet. The amounts due have not been paid due to an ongoing lawsuit between Mattel Inc. and MGA Entertainment Inc. wherein Mattel has legally challenged MGA’s trademark rights to the BRATZ™ franchise.

NYSE AMEX EQUITIES STATUS

On June 22, 2009 the Company received notice from NYSE Amex Equities (“AMEX”) that it has determined that our common stock will be delisted and no longer trade on the exchange. The Company’s Board of Directors decided that it was not in the best interest of the Company and its shareholders to expend the financial resources necessary to appeal the decision and continue to be listed on AMEX. On July 6, 2009, the Company’s stock was suspended from trading on AMEX. The Company immediately applied for admission to the Over the Counter Bulletin Board (“OTCBB”) and subsequently began trading on the OTCBB on July 7, 2009 under the symbol “SMDM.”

NOTE 10 - STOCKHOLDERS' EQUITY

COMMON STOCK ISSUANCES

During the nine months ended December 31, 2009 and 2008, the Company issued 0 and 973,812 shares of its common stock, respectively.

On October 8, 2008, the Company issued 33,336 shares of common stock to directors at $.45 per share pursuant to the directors’ compensation agreement.

EARNINGS PER SHARE

In accordance with FASB ASC 210, Earnings per Share, basic (loss) earnings per share are computed by dividing the net (loss) earnings for the year by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net earnings for the year by the weighted average number of common shares outstanding including the effect of common stock equivalents.

For the nine months ended December 31, 2009 and 2008, common stock equivalents to purchase 2,016,170 and 3,213,215 shares of stock were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the Company’s common stock for the period.

STOCK OPTIONS

On June 1, 2001, the Board of Directors approved the 2001 Stock Option Plan (“Plan”), which replaced the 1994 Stock Option Plan, as amended, (the "1994 Plan"). The Plan was developed to provide a means whereby directors and selected employees, officers, consultants, and advisors of the Company may be granted incentive or non-qualified stock options to purchase common stock of the Company. As of December 31, 2009, the Plan is authorized to grant options up to an aggregate of 1,950,000 shares of the Company's common stock and up to 300,000 shares for any one individual grant in any quarter. As of December 31, 2009, the Company granted 1,319,225 options under the Year 2001 Plan with 886,710 options still outstanding, leaving 630,775 options available to be granted. There were no additional stock options issued during the nine months ended December 31, 2009. As December 31, 2009, the Company has no options still issued and no options available to be granted under the 1994 Plan, since the 1994 Plan has expired (after 10 years).

STOCK WARRANTS

As of December 31, 2009, the Company had a total of 1,250,000 stock purchase warrants outstanding. The exercise price of these warrants is $0.35. The expiration date of these warrants is July 26, 2010.

NOTE 11 - GEOGRAPHICAL INFORMATION

The majority of sales to customers outside of the United States for the three and nine months ended December 31, 2009 and 2008 were made by the Macau Subsidiary. Total consolidated sales by geographic region for the period presented are as follows:

	December 31,				December 31,
	2009		2008		2009		2008

North America	$	10,974,825	$	14,693,358	$	17,091,096	$	25,308,845
Europe		1,000,936		1,805,009		2,665,742		4,969,905
Others		-		113,199		24,303		719,558
	$	11,975,761	$	16,611,566	$	19,781,141	$	30,998,308

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

NOTE 12 – DUE TO RELATED PARTIES, NET

As of December 31, 2009 and March 31, 2009 the Company had amounts due to related parties in the amounts of $3,353,258 and $1,498,391, respectively consisting primarily of non-interest bearing trade payables and expenses due to Starlight affiliates.

NOTE 13 – RELATED PARTY TRANSACTIONS

On December 15, 2009, the Company obtained a short term loan from Starlight Electronics Company in the amount of $493,250. The proceeds were used to pay for inventory from one of our vendors, Arts Electronics. The loan bears interest at 1.77% and is scheduled to be repaid prior to March 31, 2010. As of the third quarter ended December 31, 2009 the remaining amount due to Starlight Electronics Company is $296,680.

On May 23, 2008, SMC Logistics entered into a service and logistics agreement with affiliates Starlight Consumer Electronics (USA), Inc. and Cosmo Communications Corp. (“Cosmo”) to provide logistics, fulfillment, and warehousing services for Starlight and Cosmo’s domestic sales. The Company received $872,937 and $1,032,775 in service fees from these affiliates during the nine months ended December 31, 2009 and December 31, 2008, respectively.

On April 1, 2008, the Company issued 940,476 shares of common stock to Starlight Industrial Holdings, Ltd. for $197,500 ($.21 per share) as payment for certain payables owed by the Company for tooling. There was no common stock issue to related parties during the first nine months ended December 31, 2009.

The Company purchased products from Starlight Marketing Macao, a subsidiary of Starlight International Holding Ltd. The purchases from Starlight Marketing Macao for the nine month period ended December 31, 2009 and 2008 were $5,080,767 and $10,049,102, respectively. In addition, the Company also purchased molds and tooling from Star Light Electronics Co., Ltd in the amount of $177,772 and $447,162 for the nine months ended December 31, 2009 and December 31, 2008 respectively, which are included in Property and Equipment in the accompanying Consolidated Balance Sheets.

NOTE 14 – SUBSEQUENT EVENTS

We evaluated the effects of all subsequent events from the end of the second quarter ended December 31, 2009 through February 11, 2010, the date we filed our financial statements with the U.S. Securities and Exchange Commission ("SEC"). There were no events to report during this evaluation period.

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

FORWARD-LOOKING STATEMENTS

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

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

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

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

OVERVIEW

The Singing Machine Company, Inc., a Delaware corporation, (the "Singing Machine," "we," “us” or "ours") and our subsidiaries are primarily engaged in the design, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings. The Company’s products are sold directly to distributors and retail customers. Our electronic karaoke machines and audio software products are marketed under The Singing Machine(R) and Motown trademarks.

Our products are sold throughout North America and Europe, primarily through department stores, lifestyle merchants, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores and warehouse clubs.

Our karaoke machines and karaoke software are currently sold in such major retail outlets as Costco, Kohl's, J.C. Penney, Toys R Us, Wal-Mart and Sam's Club. Our business has historically been subject to significant seasonal fluctuations causing our revenues to vary from period to period and between the same periods in different fiscal years. Thus, it may be difficult for an investor to project our results of operations for any given future period. We are uncertain of how significantly our business will be harmed by a prolonged economic recession but, we anticipate that continued contraction of consumer spending will negatively affect our revenues and profit margins.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items related to our consolidated statements of operations as a percentage of net sales for the three months and nine months ended December 31, 2009 and 2008.

The Singing Machine Company, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

	For Three Months Ended						For Nine Months Ended
	December 31, 2009			December 31, 2008			December 31, 2009			December 31, 2008

Net Sales		100.0	%		100.0	%		100.0	%		100.0	%

Cost of Goods Sold		75.0	%		77.3	%		79.3	%		80.7	%

Gross Profit		25.0	%		22.7	%		20.7	%		19.3	%

Operating Expenses
Selling expenses		14.3	%		9.9	%		13.4	%		8.6	%
General and administrative expenses		7.3	%		8.7	%		13.5	%		10.8	%
Depreciation and amortization		1.0	%		0.7	%		1.6	%		1.1	%

Total Operating Expenses		22.6	%		19.3	%		28.5	%		20.5	%

Income (Loss) from Operations		2.4	%		3.4	%		-7.8	%		-1.2	%

Other Income (Expenses)
Interest expense		-0.3	%		-0.4	%		-0.4	%		-0.3	%

Income (Loss) before provision for income taxes		2.1	%		3.0	%		-8.2	%		-1.5	%

Provision for income taxes		0.0	%		-0.2	%		0.0	%		-0.1	%

Net Income (Loss)		2.1	%		2.8	%		-8.2	%		-1.6	%

QUARTER ENDED DECEMBER 31, 2009 COMPARED TO THE QUARTER ENDED DECEMBER 31, 2008

NET SALES

Net sales for the quarter ended December 31, 2009 decreased to $11,975,761 from $16,611,566, a decrease of $4,635,805 as compared to the same period ended December 31, 2008. This decrease in sales is primarily due to a significant drop in direct import sales through our Macau subsidiary to both North American and international customers. For the quarter ended December 31, 2009 sales to international customers decreased by approximately $917,000 and sales to domestic customers decreased by approximately $3,719,000 compared to the quarter ended December 31, 2008. This was primarily due to overstock conditions in both domestic and international customers and continued economic recession concerns.

GROSS PROFIT

Our gross profit for the quarter ended December 31, 2009 decreased to $2,993,762 from $3,771,843 a decrease of $778,081 as compared to the same period in the prior year. This decrease is primarily due to the decrease in revenue in the quarter as compared to the same quarter in the prior year. As a percentage of revenues, our gross profit for the three months ended December 31, 2009 increased to 25.0% from 22.7% for the same period in 2008. The increase in gross profit as a percentage of revenues was primarily due to the lower mix of direct import business which typically yields lower profit margins.

OPERATING EXPENSES

For the quarter ended December 31, 2009, total operating expenses decreased to $2,705,209. This represents a decrease of $495,181 from the same period’s quarter ended total operating expenses of $3,200,390. This decrease was primarily due to reduced selling and general administrative expenses associated with the decreased amount of sales and personnel reductions.

Factors contributing to the decrease in operating expenses are as follows:

1) Selling expenses increased $66,354 which was primarily due to an additional $250,000 advertising allowance granted to a major customer which was offset by decreased royalty expense due from decreased sales of licensed Bratz products offset and commissions due to lower sales volume.

2) General and administrative expenses decreased $560,613 which was primarily due a decrease of approximately $131,000 in compensation expenses due to reduction in the workforce, reduced travel of approximately $34,000 and other expense reductions. In addition, the Company took a charge of $150K in bad debt reserve for Circuit City during the three months ended December 31, 2008 compared to the quarter ended December 31, 2009 where there were no significant bad debt issues.

INCOME FROM OPERATIONS

Income from operations decreased $282,900 this quarter, to $288,553 for the three months ended December 31, 2009 compared to net income from operations of $571,453 for the same period ended December 31, 2008. The decrease was primarily due to the decrease in net sales compared to the same period in the prior year.

OTHER INCOME/EXPENSES

Our net other expenses (interest expense) decreased to $41,244 from $71,670 for the same period a year ago. The decrease in interest expense was due to a smaller amount of vendor financing required due to lower sales volume and lower interest rates on our factoring facility.

INCOME TAXES

For the three months ended December 31, 2009 the Company did not record a tax provision because it expects current year-to-date losses and sufficient future net losses to offset the income for these periods. For the three months ended December 31, 2008 the Company recorded a provision for income taxes due to a payment made for alternative minimum tax.

NET INCOME

For the three months ended December 31, 2009 net income decreased to $247,309 compared to net income of $463,701 for the same period a year ago. The decrease of net income was primarily due to the decrease in revenue as compared to the same period in the prior year.

NINE MONTHS ENDED DECEMBER 31, 2009 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 2008

NET SALES

Net sales for the nine months ended December 31, 2009 decreased to $19,781,141 from $30,998,308, a decrease of $11,217,167 as compared to the same period ended December 31, 2008. This decrease in sales is primarily due to a significant drop in direct import sales through our Macau subsidiary to both North American and international customers. For the nine months ended December 31, 2009 sales to international customers decreased by approximately $2,627,000 and direct import sales to domestic customers decreased by approximately $13,510,000 compared to the quarter ended December 31, 2008. These decreases were somewhat offset by an increase in sales to domestic customers from our California warehouse facility. Economic recession concerns and overstock situations from both International and some domestic customers were the primary reason for the drop in direct import sales.

GROSS PROFIT

Our gross profit for the nine months ended December 31, 2009 decreased to $4,091,744 from $5,995,443, a decrease of $1,903,699 as compared to the same period in the prior year primarily due to the decrease in revenue for the comparable periods. As a percentage of revenues, our gross profit for the nine months ended December 31, 2009 increased to 20.7% from 19.3% for the same period in 2008. The increase of gross profit as a percentage of revenues was primarily due to the lack of Direct Import shipments which generally yield lower gross profit margins.

OPERATING EXPENSES

For the nine months ended December 31, 2009, total operating expenses decreased to $5,638,253 from $6,337,881 for the nine months ended December 31, 2008, a decrease of $699,628. Selling expenses decreased $7,550 generally due to decreases in commissions due to sales volume and offset by additional advertising allowance granted to a major customer. General and Administrative expenses decreased $688,761 due to approximately $156,000reduced logistics expenses because of decreased shipment volume and expense cuts, approximately $121,000 in payroll reduction, a decrease of approximately $78,000 in travel expense and a decrease of approximately $330,000 in the Macau subsidiary office due to the significant decrease in Direct Import activity.

OTHER INCOME/EXPENSES

Our net other expenses decreased to $72,195 (interest expense) from $104,671 (interest expense) for the same period a year ago due primarily to a slight decrease in interest rates and the decrease in product financed due to sales volume decreases as compared to the same period a year ago.

INCOME TAXES

For the nine months ended December 31, 2009 the Company did not record a tax provision because it expects current year-to-date losses and sufficient future net losses to offset the income for these periods. For the nine months ended December 31, 2008 the Company recorded a provision for income taxes due to a payment made for alternative minimum tax.

NET LOSS/INCOME

We incurred a net loss $1,618,704 for the nine months ended December 31, 2009 compared to a net loss of $483,191 for the same period a year ago. The increase in net loss was primarily due to the decrease in revenues.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2009, Singing Machine had cash on hand of $1,777,340 as compared to cash on hand of $1,799,951 as of December 31, 2008. We had working capital of $21,699 as of December 31, 2009.

Net cash used in operating activities was $1,904,402 for the nine months ended December 31, 2009, as compared to $921,763 used in operating activities the same period a year ago. The increase in net cash used was a result of the following factors: increase in accounts receivable due to late quarter domestic shipments offset by a decrease in inventory due to efforts to sell existing stock.

Net cash used by investing activities for the nine months ended December 31, 2009 was $214,500 as compared to $720,150 used by investing activities for the same period ended a year ago. This decrease was caused primarily by limiting the amounts of capital expenditures for the current fiscal year.

Net cash provided by financing activities was $2,939,079 for the nine months ended December 31, 2009, as compared to $2,993,248 for the same period ended a year ago. The Company increased its use of available credit facilities from DBS bank and reduced its reliance on related party and vendor financing as compared to the same period ended December 31, 2008

As of December 31, 2009, our unrestricted cash on hand was $1,777,340. Our average monthly general and administrative expenses are approximately $300,000. We expect that we will require approximately $1 million for working capital during the next three-month period.

During the next 12 month period, we plan on financing our operation needs by:

Raising additional working capital;

Collecting our existing accounts receivable;

Selling existing inventory;

Vendor financing;

Borrowing from factoring bank;

Short term loans from our majority shareholder;

Fees for fulfillment, delivery and returns services from related parties.

Our sources of cash for working capital in the long term, 12 months and beyond, are essentially the same as our sources during the short term. We are actively seeking additional financing facilities and capital investments to maintain and grow our business. If we need to obtain additional financing and fail to do so, it may have a material adverse effect on our ability to meet our financial obligations and to continue as a going concern.

INVENTORY SELL THROUGH

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

SEASONAL AND QUARTERLY RESULTS

Historically, our operations have been seasonal, with the highest net sales occurring in our second and third fiscal quarters (reflecting increased orders for equipment and music merchandise during the Christmas holiday season) and to a lesser extent the first and fourth quarters of the fiscal year. Sales in our second and third fiscal quarters, combined, accounted for approximately 92.0% and 87.8% of net sales in fiscal 2009 and 2008, respectively.

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

We are currently developing and considering selling products other than those within the karaoke category during the slow season to fulfill the revenue shortfall.

INFLATION

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

OFF-BALANCE SHEET ARRANGEMENTS

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

CRITICAL ACCOUNTING POLICIES

We prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating our reported financial results include: accounts receivable allowance for doubtful accounts, reserves on inventory, deferred tax assets and our Macau income tax exemption.

COLLECTIBILITY OF ACCOUNTS RECEIVABLE. 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. 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.

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. Management regularly reviews the Company's investment in inventories for such declines in value.

INCOME TAXES. 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 any valuation allowances that might be required against the deferred tax assets. 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 more likely than not that the asset will not be realized.

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 jurisdiction have been made.

USE OF 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.

ITEM 4T. CONTROLS AND PROCEDURES

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

(b) Changes in Internal Controls. We reported certain material weaknesses in our internal controls over financial reporting in our annual report on Form 10-K for the year ended March 31, 2009. The Company is still in the process of addressing these material weaknesses and will continue to update the Exchange as to our remediation progress.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

RISKS ASSOCIATED WITH OUR BUSINESS

CURRENT LEVELS OF SECURITIES AND FINANCIAL MARKET VOLATILITY ARE UNPRECEDENTED.

The capital and credit markets have been experiencing volatility and disruption for more than 12 months. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers. We believe these credit market disruptions have likely decreased our ability to access debt and equity financing. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

We are not currently in default upon any of our senior securities.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

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

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

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

* Filed herewith

SIGNATURES

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

THE SINGING MACHINE COMPANY, INC.

Date: February 11, 2010	By:	/s/ Gary Atkinson
		Gary Atkinson
		Interim Chief Executive Officer

		/s/ Carol Lau
		Carol Lau
		Interim Chief Financial Officer