Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to
view the Company from management’s perspective, considering items that would have a material impact on future operations.
The
following discussion summarizes the significant factors affecting our results of operations and financial condition as of and during
the years ended March 31, 2022 and 2021 and should be read in conjunction with our consolidated financial statements and related notes
included elsewhere in this report. This discussion contains forward-looking statements based upon current plans, expectations and beliefs
that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated
in or implied by these forward-looking statements as a result of several factors, including those discussed in the section captioned
“Risk Factors” included under Part I, Item 1A and elsewhere in this report. See also the section captioned “Disclosure
on Forward-Looking Statements” in this report.
15
OVERVIEW
Our
primary objectives for the fiscal year ended March 31, 2022 (“Fiscal 2022”) were to:
●
increase
our revenues by expanding our product lines and customer base;
●
maintain
the general and administrative costs while increasing revenue;
●
decrease
ending inventory on hand;
●
improve
profitability;
Revenues
increased by approximately $1.7 million or approximately 3.7% primarily due to an increase in our two largest customers of approximately
$4.2 million who increased the number of products offered offset by decreases in two of our top-five customers who experienced a decrease
of approximately $2.5 million in sales of Carpool Karaoke (“CPK”) product. Gross profit margins decreased by approximately
4.0 margin points to 22.8% primarily due a decrease of approximately $3.1 million in sales of high margin yield CPK product which accounted
for approximately 3.0 margin points of the decrease offset by reduction in co-op promotion incentives of approximately $0.2 million or
approximately 0.7 points as several major customers did not offer their usual holiday campaigns due to supply issues caused by global
logistics issues. The remaining decrease of approximately 1.7 points of gross margin was primarily due to unit cost increases to products
from increases in raw materials and a significant increase in freight costs due to global logistics issues that were only partially passed
on to customers. Operating expenses decreased approximately $0.1 million primarily due a decrease in royalties paid on CPK licensed product
of approximately $0.3 million offset by an increase in general and administrative expenses of approximately $0.2 million primarily due
to an increase consultation and professional services associated with guidance in investor relations and planning of contemplated one-time
capital transactions. Inventory on hand increased by approximately $8.7 million of which approximately $5.4 million was for late delivery
of seasonal product due to global logistics difficulties during peak season. The remaining increase in inventory was primarily due to
new products purchased by one major customer that partially shipped during the first quarter ended June 30, 2022 with the remaining scheduled
to ship during the second quarter ending September 30 2022. Net income decreased by approximately $1.9 million primarily due to an approximately
$1.5 million reduction in gross profit margin with the remaining decrease primarily due to reduced net one-time gains.
RESULTS
OF OPERATIONS
The
following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company’s
total revenues:
For the Fiscal Years Ended
March 31, 2022
March 31, 2021
Net Sales
100.0 %
100.0 %
Cost of Sales
77.2 %
73.2 %
Operating Expenses
22.6 %
23.7 %
Operating Income
0.1 %
3.1 %
Other Income, Net
0.4 %
2.5 %
Income Before Income Tax (Provision) Benefit
5.0 %
5.6 %
Income Tax (Provision) Benefit
0.1 %
-1.0 %
Net Income
0.4 %
4.6 %
FISCAL
YEAR ENDED MARCH 31, 2022 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2021
NET
SALES
Net
sales for the year ended March 31, 2022 (“Fiscal 2022”) were approximately $47.5 million. This represents an increase of
approximately $1.7 million as compared to approximately $45.8 million in the fiscal year ended March 31, 2021 (“Fiscal 2021”).
This increase was primarily due an increase in sales to our two largest customers of approximately $4.2 million who increased the number
of products offered to its customers and offset by decreases in two of our top-five customers that experienced a decrease of approximately
$2.5 million in sales of CPK product.
GROSS
PROFIT
Gross
profit for Fiscal 2022 was approximately $10.8 million or 22.8% of total revenues compared to approximately $12.3 million or 26.8% of
sales for Fiscal 2021, a decrease of approximately $1.5 million as compared to the same period in the prior year. There was a decrease
in our gross profit margin of approximately 4.0 margin points which accounted for approximately $2.2 million gross profit margin. This
decrease was offset by the gross profit contribution of approximately $0.5 million due to the increase in net sales as explained above
and a decrease in co-op promotions of approximately $0.2 million.
16
Gross
profit margin for Fiscal 2022 was 22.8% compared to 26.8% for Fiscal 2021, a decrease of 4.0 margin points. The decrease in CPK sales
as discussed above contributed approximately 3.0 margin points of the decrease. There was a gross profit margin increase of approximately
0.7 margin points due to a decrease in promotion incentives of approximately $0.2 million. The remaining 1.7 gross margin point decrease
was primarily due to product cost increases in raw materials and a significant increase in freight costs due to global logistics issues
that were only partially passed on to customers.
OPERATING
EXPENSES
During
the fiscal year ended March 31, 2022, our operating expenses decreased from approximately $10.9 million to approximately $10.8 million,
a decrease of approximately $0.2 million compared to the same period last year. Selling expenses decreased by approximately $0.4 primarily
due to decreased royalty expense of approximately $0.3 million commensurate with the decrease in CPK product sales as explained above.
There was an increase in discretionary marketing expense of approximately $0.4 million which included approximately $0.1 million to upgrade
our website and develop direct-to consumer business. This increase was offset $0.4 million due to a decrease of approximately $0.3 million
in outbound freight as we were able to move one major customer from shipping terms from freight prepaid to freight collect. The decrease
in selling expenses of $0.4 million was offset by an increase in general and administrative expenses of approximately $0.2 million primarily
due to an increase consultation and professional services associated with guidance in investor relations and planning of contemplated
one-time capital transactions.
OTHER
INCOME (EXPENSES)
Other
income (expenses), net decreased by approximately $1.0 million to approximately $0.2 in other income, net for the fiscal year ended March
31, 2022 compared to approximately $1.2 million in other income, net for the same period ended March 31, 2021. For the fiscal year ended
March 31, 2022 there were one-time gains of approximately $0.4 million for the forgiveness of the Paycheck Protection Program loan and
a gain of approximately $0.4 million primarily from a vendor settling accounts payable related to a damaged goods incident that occurred
in the fiscal year ended March 31, 2020. This compares to the fiscal year ended March 31, 2021 when there were one-time gains associated
with the recovery of approximately $1.1 million in out-of-pocket expenses relating to a prior year damaged goods insurance claim and
a vendor settling accounts payable of $0.4 million from the factory that caused the damage. There was an additional one-time gain of
approximately $0.2 million from Cosmo, a related party, related to payment in fiscal 2021 of prior year sales which were reversed and
the related receivable was initially deemed uncollectible and written off in the prior fiscal year.
Interest
and amortization expense associated with the financing terms of the Crestmark Bank financing facility and Ironhorse financing facility
increased to approximately $0.6 million for the fiscal year ended March 31, 2022 from approximately $0.5 million for the year ended March
31, 2021, an increase of approximately $0.1 million.
INCOME
BEFORE INCOME TAX PROVISION
We
had income before income tax provision of approximately $0.3 million in Fiscal 2022 compared to income before income tax provision of
approximately $2.6 million in Fiscal 2021 for a total decrease in income before income tax provision of approximately $2.3 million. Net
income from operations contributed approximately $1.4 million of the decrease due primarily to the decrease in gross profit as explained
above. The decrease in other income and expenses, net of $1.2 million as explained above accounted for the remaining decrease in income
before income tax provision.
INCOME
TAX PROVISION
Significant
management judgment is required in developing our provisions for income taxes, including the determination of foreign tax liabilities,
deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets. Management evaluates
its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is not
likely to be realized. On both March 31, 2022 and 2021, we had net deferred tax assets of approximately $0.9 million. The deferred tax
assets on March 31, 2022 and 2021 were net of a valuation allowance of approximately $78,000 and approximately $23,000, respectively
due to management’s belief that certain tax assets will more than likely expire prior to the Company’s these assets being
realized.
In
Fiscal 2022 we recognized an income tax provision of approximately $0.1 million compared to an income tax provision of approximately
$0.5 million in Fiscal 2021. The Company’s effective tax rate for the fiscal year ended March 31, 2022 was approximately 20.0%
as compared to 17.4% for Fiscal 2021.
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 net income of approximately $0.2 million and $2.2 million for Fiscal 2022 and Fiscal 2021, respectively.
17
LIQUIDITY
AND CAPITAL RESOURCES
On
March 31, 2022, we had cash on hand of approximately $2.3 million as compared to cash on hand of approximately $0.4 million on March
31, 2021. The increase of cash on hand of approximately $1.9 million was primarily due to approximately $4.0 million provided by financing
activities and offset by approximately $2.0 million in net cash used in operating activities. As of March 31, 2022, our working capital
was approximately $7.8 million.
During
the next twelve-month period, we plan on financing our working capital needs primarily from:
1)
Vendor financing – All our key vendors in China have agreed to manufacture on behalf of the Company without advanced payments and
have extended payment terms to the Company. The terms with the factories are sufficient to cover the factory direct import sales which
are expected to account for approximately 60% of the total revenues in the fiscal year ending March 31, 2023.
2)
Credit Facility - We currently have an Intercreditor Revolving Credit Facility with Crestmark Bank for a $10.0 million facility (decreasing
to $5.0 million in off-peak season) on eligible accounts receivable under an evergreen arrangement that terminates upon written notice
by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11.
We also have a $2.5 million facility on eligible inventory with Iron Horse Credit that was to expire on June 11, 2022. However, absent
any termination notice given by the Company to IHC, the current financing arrangement automatically renewed for another twelve-month
term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date. Approximately $4.0 million
of borrowings are available under all our credit facilities as of the date of this filing .
3)
Equity Raise – On May 23, 2022, we entered into an underwriting agreement (the “Underwriting
Agreement”) with Aegis Capital Corp., who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten
public offering (the “Offering”) pursuant to which the Company sold to the Underwriter 1,000,000 shares (the “Shares”)
of common stock, par value $0.01 per share (the “Common Stock”) for gross proceeds of $4.0 million prior to deducting underwriting
discounts and commissions and other estimated offering expenses. After underwriter discounts, commissions and other estimated offering
expenses of approximately $0.7 million we received approximately $3.3 million to be used as working capital. The offering closed on May
26, 2022.
The
Company believes that its cash on hand, working capital (net of cash), cash expected to be generated from its operating forecast, along
with the availability of cash from its credit facilities, will be adequate to meet the Company’s liquidity requirements for at
least twelve months from the filing of this annual report .
Cash
used in operating activities in Fiscal 2022 was approximately $2.0 million. There was an increase in inventory of approximately $8.4
million of which approximately $3.7 million was additional inventory due to product that was delivered too late for seasonal shipments
as a result of global logistics difficulties, approximately $3.3 million was new product purchased for one major customer that was in-transit
with the remaining increase primarily due to CPK inventory to be re-launched during the upcoming fiscal year. There was an increase in
accounts receivable of approximately $0.6 million due to later than usual shipments due to global logistics issues. These decreases in
cash used in operations were offset by an increase in amounts due from banks of approximately $4.5 million due to cash required to pay
vendors for the additional inventory and an increase in accounts payable of approximately $2.5 million primarily due to new seasonal
goods in-transit.
Cash
provided by operating activities in Fiscal 2021 was approximately $0.2 million. There was net income of approximately $2.1 million. There
was a decrease in inventory of approximately $2.1 million primarily due to increased demand for our CPK product through social media
awareness and increased demand for our home-based entertainment products during the COVID pandemic which allowed us to sell through most
of the excess inventory from the prior fiscal year. There was a decrease in insurance receivable of approximately $1.3 million associated
with the recovery of a pending insurance claim associated with water damaged goods in the prior fiscal year. These increases in cash
provided by operations were offset by a reduction in accounts payable of approximately $3.2 million primarily due to the payment of significant
amounts held back from the factory that caused the damaged goods issue in the prior fiscal year upon receipt of the related insurance
claim proceeds. There was an increase in amounts due from banks of approximately $2.2 million due to excess cash collected over amounts
due on the lines of credit associated with the operating cash generated from the reduction in inventory. There was a decrease in refunds
due to customers of approximately $0.7 million associated with the settlement of the unpaid portion of chargebacks for damaged goods
due to one customer from the prior fiscal year.
Cash
used in investing activities for Fiscal 2022 and Fiscal 2021 was approximately $0.1 million and $0.2 million, respectively primarily
for the purchase of molds and tooling for new karaoke models.
Net
cash provided by financing activities for Fiscal 2022 was approximately $4.0 million. We received loan proceeds from our inventory line
of credit of approximately $2.4 million. In August 2021, the Company received net proceeds of approximately $1.8 million from the execution
of private placement and stock redemption agreements as summarized in the next two paragraphs. These financing activities were offset
by a payment of $150,000 on the subordinated related party debt, with the remaining offset primarily due to payments made on scheduled
installments on installment notes and finance leases.
18
In
August 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional
investors and a strategic investor for private placement of (i) 550,000 shares of its common stock (the “Shares”) together
with common warrants to purchase up to 550,000 shares of common stock for an exercise price of $10.50 per share, and (ii) 561,111 pre-funded
warrants (“Pre-Funded Warrants”) with each Pre-Funded Warrant exercisable for one share of common stock at an exercise price
of $0.01 per share, together with Common Warrants to purchase up to 561,111 shares of common stock at an exercise price of $10.50 per
share (the “Private Placement”). The closing of the Private Placement took place on August 10, 2021, when the Shares, Common
Warrants, and Pre-Funded Warrants were delivered to the purchasers and funds, in the amount of approximately $9,800,000, were received
by the Company. Approximately $7,200,000 of the funds received were used to repurchase shares of the Company pursuant to that certain
Redemption Agreement discussed below. The Company received an increase in working capital of approximately $1,800,000 of working capital
after settlement of expenses associated with closing of these transactions.
In
August, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with koncepts
International Limited (“koncepts”) and Treasure Green Holdings, Ltd. (“Treasure Green”), pursuant to which
the Company agreed to redeem 654,105 shares of common stock of the Company (the “Redeemed Shares”). The closing of the
transactions set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned
and transferred back to the Company in consideration of a payment of approximately $7,200,000 to koncepts and Treasure Green. The
Redeemed Shares were retired and returned to the unissued authorized capital of the Company Net cash provided by financing
activities for Fiscal 2021 was approximately $0.1 million. We received loan proceeds from Crestmark in the amount of approximately
$0.4 million under the Paycheck Protection Program. We received additional proceeds from our inventory line of credit of
approximately $0.1 million. These proceeds were offset by principal payments made on subordinated related party debt of $0.3 million
and payments on financed leases and installment notes of approximately $0.1 million.
We currently have an Intercreditor Revolving Credit
Facility with Crestmark Bank for a $10.0 million facility (decreasing to $5.0 million in off-peak season) on eligible accounts receivable
under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by
the Company anytime other than the annual renewal date of June 11. We also have a $2.5 million facility on eligible inventory with Iron
Horse Credit that was to expire on June 11, 2022. However, absent any termination notice given by the Company to IHC, the current financing
arrangement automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior
to the twelve-month renewal date.
As
of this filing, we have borrowed approximately $2.5 million on the IHC Facility, which is the maximum loan amount allowed on eligible
inventory and approximately $0.0 million on our Crestmark Facility which will make available up to $10.0 million of eligible accounts
receivable as the next twelve months progress as long as the loan is in place. As of this filing the Company has approximately $1.0 million
currently available from these two credit facilities based on eligible inventory with IHC and eligible accounts receivable with Crestmark.
On
May 5, 2020, the Company received loan proceeds from Crestmark in the amount of approximately $444,000 under the Paycheck Protection
Program (“PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”),
which provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying
business. The loans and accrued interest may be forgivable to the extent the Company uses the loan proceeds for eligible purposes, including
payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness may be reduced if the borrower
terminates employees or reduces salaries during the eligible period. The unforgiven portion of the PPP loan is payable over two years
at an interest rate of 1%, with a deferral of payments until a forgiveness application has been accepted and reviewed by the Small Business
Administration (“SBA”). For the year ended March 31, 2021 the Company incurred interest expense of approximately $4,000.
In June 2021 the Company received notification from the SBA that the loan had been forgiven in its entirety. For the fiscal year ended
March 31, 2022, a gain of approximately $448,000 (including principal and interest) from the forgiveness of the loan was included in
other income (expenses), net in the accompanying consolidated statements of income.
In
August 2019, a major customer received goods that were significantly water damaged due to excess moisture absorbed in pallets shipped
by the factory. As a result, we incurred a loss in cash flow of approximately $1.6 million in lost revenue and approximately $0.8 million
in additional out of pocket expenses to retrieve, inspect, warehouse and properly destroy the goods in the prior fiscal year. As of this
filing we have we recovered approximately $2.3 million from our cargo insurance coverage which settled approximately $1.3 million in
insurance claim receivable with the remaining proceeds reflected in other income and (expenses) as a gain from damaged goods insurance
claim in the consolidated statement of income for the fiscal year ended March 31, 2021. For the fiscal year ended March 31, 2022 we secured
vendor invoice credits of approximately $0.2 million from the manufacturer’s representative of the factory that caused the damage.
For the fiscal year ended March 31, 2021 there was a gain from damaged goods insurance claim of approximately $1.1 and we secured vendor
invoice credits of approximately $0.4 million from the factory that caused the damage which is reflected as gain from extinguishment
of accounts payable in the consolidated statements of income.
EXCHANGE
RATES
We
sell most of our products in U.S. dollars with some sales to certain Canadian customers in Canadian Dollars and pay for all of our manufacturing
costs in either U.S. or Hong Kong dollars. We are subject to risks involved in the exchange rate between the Canadian and US dollar,
however, even though the exchange rate has fluctuated between $1.23 to $1.29 CAD to the U.S. Dollar during peak selling and collection
season in Fiscal 2022 sales volume sold in Canadian dollars was not significant and the associated exchange rates did not have a material
impact on the Company’s financial results. Operating expenses of the Macau office are paid in either Hong Kong dollars or Macau
Pataca (MOP). 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 approximately 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, Hong Kong and Canadian currencies will continue to be stable and exchange rate fluctuations
may have a material effect on our business, financial condition or results of operations.
19
SEASONAL
AND QUARTERLY RESULTS
Historically,
our operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders
for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the
fiscal year. Sales in our fiscal second and third quarter, combined, accounted for approximately 81% and 86% of net sales in Fiscal 2022
and Fiscal 2021, respectively.
Our
results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to
customers. We may experience quarter to quarter fluctuations in product landed cost as the cost of shipping containers, drayage port
delay charges and other logistics related costs increase as peak shipping season arrives. The fulfillment of orders can therefore significantly
affect results of operations on a quarter-to-quarter basis.
During
2021 and continuing into 2022, the United States has experienced a rapid increase in inflation levels of over 8.6%, which is now at a
40-year historic high. Such heightened inflationary levels may negatively impact consumer disposable income and discretionary spending
and, in turn, reduce consumer demand for our products and increase our costs and could significantly affect results of operations on
a quarter-to-quarter basis.
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, reserves on inventory, revenue recognition and reserve for sales returns and income taxes.
ACCOUNTS
RECEIVABLE AND COLLECTIBILITY
The
Singing Machine’s accounts receivable consist of amounts due from customers in the ordinary course of business. Accounts receivable
are carried at cost, net of allowances for uncollectible amounts. 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. The Company is subject
to chargebacks from customers for co-op promotion incentives, defective returns, return freight and handling charges that are deducted
from open invoices and reduce collectability of open invoices.
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 due to excess supply on-hand, slow-moving product and end-of-life product. On March
31, 2022 and 2021 the Company had inventory reserves of approximately $0.4 million and $0.6 million, respectively.
REVENUE
RECOGNITION AND RESERVE FOR SALES RETURNS
The
Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 606, “Revenue from Contracts with Customers”. All revenue is generated from contracts with customers.
The Company recognizes revenue when control of the goods sold is transferred to the customer, in an amount, referred to as the transaction
price, that reflects the consideration to which the Company is expected to be entitled in exchange for those goods. 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.
Costs
incurred in fulfilling contracts with customers include administrative costs associated with the procurement of goods are included in
general and administrative expenses, in-bound freight costs are included in the cost of goods sold and accrued sales representative commissions
are included in selling expenses in the accompanying consolidated statements of income as our underlying customer agreements are less
than one year.
20
The
Company selectively participates in a retailer’s co-op promotion incentives to maximize sales of the Company’s products on
the retail floor or to assist in developing consumer awareness of new product launches, by providing marketing fund allowances to our
customers. As these co-op promotion incentives are not a distinct good or service and the Company cannot reasonably estimate the fair
value of the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers
are recorded as a reduction to net sales. For the fiscal years ended March 31, 2022 and 2021, co-op promotion incentives were approximately
$1.7 million and $2.0 million, respectively.
The
Company disaggregates revenues by product line and major geographic region as most of its revenue is generated by the sales of karaoke
hardware and the Company has no other material business segments (See NOTE 12 – SEGMENT INFORMATION).
While
the Company generally does not contractually provide for overstock returns, the Company does provide for variable consideration contingent
upon the occurrence of uncertain future events. Variable consideration is estimated at the expected value or at the most likely amount
depending on the type of consideration. 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, 2022 and 2021 the Company received sales returns of approximately $3.6 million and $4.1 million, respectively.
The return of products is due to a variety of reasons including defective units, customers’ overstock and buyer’s remorse.
The primary reason for the decrease of approximately $0.5 million in returns was primarily due a decrease in overstock returns from major
customers.
The
Company’s reserve for sales returns were approximately $1.0 million as of March 31, 2022 and 2021 (See Note 16 – RESERVE
FOR SALES RETURNS).
INCOME
TAXES
We
operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. Because of the complex issues involved,
any claims can require an extended period to resolve. 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.
RECENT
ACCOUNTING PRONOUNCEMENTS
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 are effective for our fiscal year beginning April 1, 2023 including interim periods within that fiscal year.
Early adoption is permitted. We are currently evaluating the potential effects of this updated guidance on our consolidated financial
statements and related disclosures.
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 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.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
21