Algorhythm Holdings, Inc. 10-K/A

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company has traded on the Over the Counter Bulletin Board (“OTCBX”) under the symbol “SMDM”. Set forth below is the range of high and low sales prices for our common stock during Fiscal 2020 and Fiscal 2019. FISCAL PERIOD HIGH LOW Fiscal 2020: First quarter (April 1 - June 30, 2019) $ 0.44 $ 0.26 Second quarter (July 1 - September 30, 2019) 0.34 0.22 Third quarter (October 1 - December 31, 2019) 0.31 0.24 Fourth quarter (January 1 - March 31, 2020) 0.26 0.10 Fiscal 2019: First quarter (April 1 - June 30, 2018) $ 0.47 $ 0.33 Second quarter (July 1 - September 30, 2018) 0.44 0.31 Third quarter (October 1 - December 31, 2018) 0.40 0.28 Fourth quarter (January 1 - March 31, 2019) 0.44 0.29 As of July 28, 2020, based upon information received from our transfer agent, there were approximately 188 record holders of our outstanding common stock. This number does not include: ● any beneficial owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries, or ● broker-dealers or other participants who hold or clear shares directly or indirectly through the Depository Trust Company, or its nominee, Cede & Co. DIVIDENDS We have never declared or paid cash dividends on our common stock and our Board of Directors intends to continue its policy for the foreseeable future. Future dividend policy will depend upon our earnings, financial condition, contractual restrictions and other factors considered relevant by our Board of Directors and will be subject to limitations imposed under Delaware law. EQUITY COMPENSATION PLAN INFORMATION The following table summarizes our equity compensation plan information as of March 31, 2020: ISSUANCE UNDER EQUITY PLAN CATEGORY NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE COMPENSATION PLANS (EXCLUDING SECURITIES IN COLUMN (A)) Equity Compensation Plans approved by Security Holders 580,000 $ .06 0 Equity Compensation Plans Not approved by Security Holders 1,650,000 $ .33 0 RECENT SALES OF UNREGISTERED SECURITIES COMMON STOCK ISSUANCES On August 30, 2019 the Company issued 60,000 shares of its common stock to a former director who exercised stock options at an average exercise price of $.17 per share. On June 12, 2019, the Company issued 32,890 shares of its common stock to our Board of Directors at $0.38 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2020. 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. 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. 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. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings. 14 PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS None. ITEM 6. SELECTED FINANCIAL DATA We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes thereto. Our fiscal year ends March 31. This document contains certain forward-looking statements regarding anticipated trends in our financial condition and results of operations and our business strategy. (See Part I, 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. Important factors to consider in evaluating such forward-looking statements include (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) various competitive market factors that may prevent us from competing successfully in the marketplace. Statements included in this Annual Report that do not relate to present or historical conditions are called “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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. RESTATEMENT AND REVISION OF THE CONSOLIDATED FINANCIAL STATEMENTS As discussed in the Explanatory Note, this Amendment to Form 10-K, amends and restates the Company’s consolidated financial statements and related disclosures in Part II, Item 8. “Financial Statements and Supplementary Data” as of and for the years ended March 31, 2020 and 2019, in order to correct an error in our accounting for co-op promotion allowances in our previously issued financial statements. The impact of the accounting correction is further illustrated in Note 2 of the “Notes to the Consolidated Financial Statements”. Accordingly, the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below are revised for the effects of these restatements. OVERVIEW Our primary objectives for the fiscal year ended March 31, 2020 (“Fiscal 2020”) were to: ● maintain our revenues by expanding our product lines and customer base; ● decrease the general and administrative costs to accommodate loss of revenue; ● decrease ending inventory on hand; ● improve profitability; Revenues decreased by approximately $5.7 million or approximately 13% primarily due to reduced holiday foot traffic at large wholesale customers, increased co-op promotion expense and lower than expected sales of the newly introduced Carpool Karaoke product. Gross profit margins decreased by approximately 0.3 margin points to 21.2% primarily due an increase in marketing co-op promotions and offset by the high margin yield of the Carpool Karaoke product. General and administrative expenses (excluding bad debt expense and recovery) increased approximately $0.8 million primarily due to unreimbursed out-of-pocket expenses of approximately $0.7 million associated with warehousing and destruction of damaged goods received by one major customer and additional insurance cost of approximately $0.1 million for credit protection on another major customer. Inventory on hand increased by approximately $1.6 million primarily due to significant overstock returns of the Carpool Karaoke product as well as traditional product associated with reduced holiday foot traffic major wholesale customers. Net loss increased by approximately $3.5 million primarily due to increased operating expenses associated with one-time losses incurred relating to water damaged goods, an increase in discretionary marketing spending associated with the rollout of the new Carpool Karaoke product and increases in co-op marketing programs. 15 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed a a percentage of the Company’s total revenues: For the Fiscal Years Ended March 31, 2020 March 31, 2019 (as restated) (as restated) Net Sales 100.0 % 100.0 % Cost of Sales 78.8 % 78.5 % Operating Expenses 29.7 % 19.1 % Operating (Loss) Income -8.5 % 2.4 % Other (Expenses), net -0.6 % -0.6 % (Loss) Income Before Income Tax Provision -9.1 % 1.8 % Benefit from (provision for) Income Taxes 1.7 % -0.2 % Net (Loss) Income -7.4 % 1.6 % FISCAL YEAR ENDED MARCH 31, 2020 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2019 NET SALES Net sales for the year ended March 31, 2020 (“Fiscal 2020”) were approximately $38.5 million. This represents a decrease of approximately $5.7million as compared to approximately $44.2 million in the fiscal year ended March 31, 2019 (“Fiscal 2019”). There was a significant decrease in sales to our UK and Canada distributors of $2.1 million and $1.4 million, respectively as both distributors ended the prior year with significant overstock inventory and purchased less inventory for Fiscal 2020. In August 2019, a major customer charged the Company back for goods that suffered severe water damage due to excess moisture absorbed in pallets shipped by the factory and as a result we incurred a loss of approximately$1.6 million in net sales. There was one major domestic customer who ended the prior year with significant inventory from the prior season and purchased approximately $1.1 million less for Fiscal 2020. There was another major domestic customer who returned approximately $0.7 million in overstock due to less than expected holiday season sales. Moreover, there was an increase in co-op promotion expense of approximately $0.6 million. These decreases to net sales of approximately $7.5million were offset by an increase in sales to one major customer of approximately $1.5 million where our products were offered in brick and mortar stores in Fiscal 2020 compared to Fiscal 2019 when our products were offered for internet fulfillment only. GROSS PROFIT Gross profit for Fiscal 2020 was approximately $8.2million or 21.2%of total revenues compared to approximately $9.5 million or 21.5%of sales for Fiscal 2019, a decrease of approximately $1.3 million as compared to the same period in the prior year. The decrease in net sales as explained above accounted for approximately $1.2 million of the decrease in gross profit and there was an increase in co-op promotion expenses of approximately $0.6 million. These decreases were offset by an increase of approximately $0.5 million due to an increase in profit margin. Gross profit margin for Fiscal 2020 was 21.2% compared to 21.5% for Fiscal 2019, a decrease of 0.3 margin points. There was an increase in gross profit margin of approximately $1.7 million or 2.6 margin points due to sales of our new licensed Carpool Karaoke which yielded average gross profit margins of 61.7%. This increase was offset by the increase in co-op promotion expenses of approximately $0.6 million or -1.4 margin points with the remaining margin point decrease primarily due the margin yield on the mix of excess core product returned by customers. OPERATING EXPENSES In fiscal year 2020, our operating expenses increased from approximately $8.4 million to approximately $11.4 million, an increase of approximately $3.0 million or 35.3% compared to the same period last year. Selling expenses increased by approximately $1.5 million due to an increase in freight expense of approximately $0.7 million due to increases in freight costs and a significant increase in freight expenses associated with returned and water damaged goods, an increase in discretionary marketing expenses of approximately $0.3 million associated with one-time expenses associated with the rollout of the new Carpool Karaoke product, an increase in royalty expense of approximately $0.3 million for royalties associated with the Carpool Karaoke product with the remaining increase due to an increase in commission expense. General and administrative expenses increased approximately $0.8 million from approximately $5.8 million in Fiscal 2019 to approximately $6.6 million in Fiscal 2020. The $0.8 million increase was primarily due to out of pocket expenses of approximately $0.7 million associated with the warehousing, inspection, and ultimate destruction of the water damaged goods returned by a major customer and increased credit insurance expense of approximately $0.1 million for J.C. Penney whose deteriorating financial condition required extra protection. This customer accounted for less than 3% of net sales for Fiscal 2020. There was an increase in bad debt expense of approximately $0.8 million primarily due to the bankruptcy filing of two customers of approximately $0.4 million compared to a partial recovery of approximately $0.4 million from Toys R Us bankruptcy administrative claims in Fiscal 2019. 16 (LOSS) INCOME BEFORE INCOME TAX BENEFIT (PROVISION) We had a loss before income tax benefit of approximately $3.5 million in Fiscal 2020 compared to income before tax provision of approximately $0.8 million in Fiscal 2019 for a total decrease in net income of approximately $4.3 million. There was a one-time charge of approximately $1.1 million in Fiscal 2020 associated with the loss on water damaged goods returned to us by a major customer due to uncertainty of the recovery amount to be received from insurance coverage and other sources. As of July 28,2020 we have recovered all of the losses including out of pocket expenses from insurance proceeds and a credit to the Company by the factory causing the damage. The remaining $3.2 million decrease is due to the decrease in sales and increased operating expenses as discussed in Net Sales, Gross Profit and Operating Expenses above. INCOME TAX BENEFIT (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. 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 March 31, 2020 and 2019, we had net deferred tax assets of approximately $1.3 million and approximately $0.8 million, respectively. The deferred tax assets on March 31, 2020 were net of a valuation allowance of approximately $0.1 million due to management’s belief that certain tax assets will more than likely expire prior to the Company’s ability to realize these assets. In Fiscal 2020 we recognized an income tax benefit of approximately $0.6 million compared to an income tax provision of approximately $0.2 million in Fiscal 2019. The Company’s effective tax rate for the fiscal year ended March 31, 2020 was approximately 18.1% as compared to 20.1% for Fiscal 2019. 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 income taxes have been made. NET INCOME As a result of the foregoing, we had a net loss of approximately $2.9 million and net income of $0.6 million for Fiscal 2020 and Fiscal 2019, respectively. LIQUIDITY AND CAPITAL RESOURCES On March 31, 2020, we had cash on hand of approximately $0.3 million as compared to cash on hand of approximately $0.2 million on March 31, 2019. The increase of cash on hand of approximately $0.1 million was primarily due to approximately $0.4 million provided by operating activities and approximately $0.2 million in net cash provided by financing activities offset by approximately $0.5 million used for the purchase of fixed assets. Cash provided by operating activities in Fiscal 2020 was approximately $0.4 million. There was a net loss of approximately $2.9 million. There was an increase in insurance receivable of approximately $1.3 million associated with the water damaged goods pending insurance claim and an increase in inventory of approximately $1.8 million primarily due to significant overstock returns and excess Carpool Karaoke inventory as sales of this product did not meet estimates. These decreases in net cash provided by operating activities were offset by an increase in accounts payable of approximately $4.2 million due to significant hold back of payments from the factory that caused the damaged goods issue pending collection of insurance proceeds, an increase in accrued expenses of approximately $0.7 million associated with estimated remaining co-op promotion allowances not yet deducted by customers, an increase in refunds due to customers of approximately $0.8 million primarily due to the unpaid portion of chargebacks for damaged goods due to one customer, and approximately $0.7 million due to related parties for services provided by the parent company and licensing fees for use of pedestal model molds and tooling belonging to the parent company. Cash provided by operating activities in Fiscal 2019 was approximately $0.2 million. There was a decrease in inventory of approximately $2.5 million primarily due to the sale of prior year’s excess inventory purchased for two major customers one of whom (Toys R Us) filed for bankruptcy. There was a decrease in amounts due from related parties decreased by approximately $0.9 million due collections made on related party shipments. There was an increase in accrued expenses of approximately $0.2 million and an increase in reserve for estimated sales returns of approximately $0.2 million. These increases in cash provided by operating activities of approximately $3.9 million were offset by increases in amounts due from PNC Bank for collections in excess of amounts due on the revolving credit facility of approximately $2.2 million, a decrease in accounts payable of approximately $0.8 million related to the decrease in sales requiring less product purchases and an increase in accounts receivable of approximately $0.7 million. Cash used by investing activities for Fiscal 2020 of approximately $0.5 million were primarily due to the purchase of a new business reporting system for approximately $0.3 million and the purchase of molds and tooling for new karaoke models of approximately $0.2 million. Cash used by investing activities for Fiscal 2019 of approximately $0.3 million were primarily due to the purchase of molds and tooling for new karaoke models. Cash provided by financing activities for Fiscal 2020 was approximately $0.2 million. Proceeds of approximately $0.4 million from installment notes for financing the new business reporting system were offset by approximately $0.2 million in scheduled payments on the remaining portion of the bank term note and payments on financed leases and installment notes. In Fiscal 2019, $0.5 million was used for scheduled payments on the bank term note. 17 As of March 31, 2020 our working capital was approximately $4.3 million. Our current liabilities of approximately $9.5 million include: ● Accounts payable of approximately $5.0 million of which approximately $4.6 million were amounts due to product vendors which will be settled with insurance proceeds and borrowings on Intercreditor Revolving Credit Facility. ● Accrued expenses of approximately $1.5 million of which approximately $0.2 million was accrued payroll, approximately $0.7 million was due to customers for co-op promotion allowances, approximately $0.2 million for other accrued expenses, approximately $0.1 million for accrued interest on subordinated related party debt, approximately $0.1 million for accrued royalties related to Carpool Karaoke and approximately $0.2 million for accrued product repairs. ● Due to related parties of approximately $0.5 million for Hong Kong office administrative expenses and mold and tooling licensing fees. ● Refunds due to customers of approximately $0.8 million - the amount will be satisfied by future purchases or refunds. ● Reserve for sales returns of approximately $1.2 million – the amount will be satisfied by future purchases or refunds. ● Current portion of operating lease liabilities of approximately $0.3 million. ● Current portion of installment notes and capital lease payments of approximately $0.1 million. WORKING CAPITAL REQUIREMENTS DURING THE SHORT AND LONG TERM During the next twelve-month period, we plan on financing our working capital needs primarily from: 1) Vendor financing – Some of 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. 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 Fiscal 2021. 2) Line of Credit - The Company now has an Intercreditor Revolving Credit Facility expiring on June 15, 2022 with Crestmark Bank for a $10.0 million facility on eligible accounts receivable and a $2.5 million facility on eligible inventory with Iron Horse Credit. Approximately $1.5 million of borrowings are available under all our credit facilities as of the date of this filing. EXCHANGE RATES We sell all of our products in U.S. dollars and pay for all of our manufacturing costs in either U.S. or Hong Kong dollars. Operating expenses of the Macau office are paid in either Hong Kong dollars or Macau Pataca (MOP). The exchange rate of the Hong Kong dollar to the U.S. dollar has been relatively stable at approximately HK $7.75 to U.S. $1.00 since 1983 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. The exchange rate of the MOP to the U.S. dollar is MOP $8.00 to U.S. $1.00. While exchange rates have been stable for several years we cannot assure you that the exchange rate between the United States, Macau and Hong Kong currencies will continue to be stable and exchange rate fluctuations may have a material effect on our business, financial condition or results of operations. 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. Sales in our fiscal second and third quarter, combined, accounted for approximately 85% and 94% of net sales in Fiscal 2020 and Fiscal 2019, 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. INFLATION Inflation has not had a significant impact on the Company’s operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts. OFF BALANCE SHEET ARRANGEMENTS None. 18 CRITICAL ACCOUNTING POLICIES AND ESTIMATES 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 included accounts receivable allowance for doubtful accounts and reserves on inventory. ACCOUNTS RECEIVABLE AND COLLECTABILITY 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. 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. 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. In Fiscal 2020 the Company purchased credit insurance of approximately $0.1 million for J.C. Penney whose deteriorating financial condition required extra protection. The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices. 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. 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. On March 31, 2020 and 2019 the Company had inventory reserves of approximately $0.4 million and $0.3 million, respectively. REVENUE RECOGNITION 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. The Company recognizes revenue when the goods are delivered and 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 at a point in time. 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. 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. Revenue is recorded in the amount of consideration the Company expects to receive for the sale of these goods. The Company selectively participates in retailer’s co-op promotion initiatives to maximize sales of the Company’s products on the retail floor or to assist in developing consumer awareness of new products launches, by providing marketing fund allowances to our customer. As these co-op promotion initiatives 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 incentives at the time they are offered to the customers are allowances recorded as a reduction to net sales. 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. 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 11). While the Company generally does not allow products to be returned, 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. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. 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. For the fiscal years ended March 31, 2020 and 2019 the Company received sales returns of approximately $5.4 million and $3.8 million, respectively. The return of products is due to a variety of reasons including defective units, customers’ overstock, and buyer’s remorse. The primary reason for the 4.9 percentage point increase in returns was primarily due to overstock returns of licensed goods from one major customer and overstock returns of non-licensed products from three other major customers. The Company’s reserve for sales returns were approximately $1.2 million and $0.9 million as of March 31, 2020 and 2019, respectively. (See Note 15 – RESERVE FOR SALES RETURNS). 19 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. 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. 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. 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. ADOPTION OF NEW ACCOUNTING STANDARDS In February 2016, the FASB issued ASU 2016-02, Topic 842, as amended, “Leases”. The ASU requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. On April 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its disclosures for the comparative periods. (See Note 8– LEASES). RECENT ACCOUNTING PRONOUNCEMENTS In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740). Among several issues addressed in this ASU, there was one area that may potentially affect the Company’s calculations of interim income tax provision or benefit. The guidance specifies that an entity should apply the annual effective tax rate to the year-to date income or loss as long as the tax benefits for any losses are expected to be realized during the year or would be recognizable as a deferred tax asset at the end of the year eliminating the requirement of a valuation allowance for that interim period. There is specific guidance for circumstances in which an entity incurs a loss on a year-to-date basis that exceeds the anticipated ordinary loss for the year, which is an exception to the general guidance in Subtopic 740-270. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We are currently evaluating the potential effects of this updated guidance on our consolidated financial statements and related disclosures. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326) . 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. The amendments in ASU 2016-03 for smaller reporting companies are effective for fiscal years beginning after 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplemental data required pursuant to this Item 8 are included in this Annual Report, as a separate section, commencing on page F-1 and are incorporated herein by reference. 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE N/A