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$SMDM 0.46 RESULTS OF OPERATIONS..FY ENDING 3/31/17

FISCAL YEAR ENDED MARCH 31, 2017 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2016

NET SALES

Net sales for the year ended March 31, 2017 (“Fiscal 2017”) were approximately $52.9 million. This represents an increase of approximately $4.0 million as compared to approximately $48.9 million in the fiscal year ended March 31, 2016 (“Fiscal 2016”). There was an increase in sales to one major customer of approximately $3.8 million due to one additional promotional product offered to its customers. There was an increase of approximately $1.0 million in sales to two major retail customers due to continued increased popularity in on-line shopping. There was an increase of approximately $0.4 million in international sales due to increased number of products sold to our United Kingdom distributor. These increases of $5.2 million were offset by an approximate $1.2 million reduction in sales to one major retail customer due to poor placement in stores in an area that had less foot traffic.

GROSS PROFIT

Gross profit for Fiscal 2017 was approximately $13.8 million or 26.1% of total revenues compared to approximately $11.9 million or 24.4% of sales for Fiscal 2016 (an increase of approximately $1.9 million). The increase in net sales as explained above accounted for approximately $0.9 million or approximately 47% of the increase with the remaining increase due to increase in gross profit margin.

Gross profit margin for the year ended March 31, 2017 compared to the same period ended March 31, 2016 increased by approximately 1.7 margin points from 24.4% to 26.1%. This increase was primarily due increased profit margins on the download product line hardware introduced during the year as compared to gross profit margin on the traditional product offerings.

OPERATING EXPENSES

In fiscal year 2017, our operating expenses, including depreciation, increased from approximately $10.0 million to approximately $10.9 million, an increase of approximately $0.9 million or 9% compared to the same period last year. Selling expenses increased by approximately $0.4 million, from $4.7 million in Fiscal 2016 to $5.0 million in Fiscal 2017. The increase was primarily due to the increase in variable selling expenses associated with the 8.3% increase in net sales as explained above.

General and administrative expenses increased approximately $0.5 million from approximately $5.2 million in Fiscal 2016 to approximately $5.7 million in Fiscal 2017. There was an increase in payroll of approximately $0.2 million primarily due to increased executive bonuses, merit pay increases and new hires in the logistics and customer service group. There was an increase of approximately $0.2 million in related-party service charges for additional services provided by the Sinostar Group during the fiscal year. The remaining increase of approximately $0.1 million due to other variable expenses associated with the increase in sales as well as the increase in third party logistics services provided to non-related parties.

INCOME BEFORE INCOME TAX (PROVISION) BENEFIT

We had income before taxes of approximately $2.7 million in Fiscal 2017 compared to income before taxes of approximately $1.6 million in Fiscal 2016. This increase of approximately $1.1 million was primarily due to the combination of the increase in gross profit of approximately $1.9 million due to the increase in sales and gross profit margin as explained in Net Sales and Gross Profit above, offset by the increase in operating and other expenses of approximately $0.8 million as explained in Operating Expenses above.

INCOME TAX (PROVISION) BENEFIT

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, 2017 and 2016, we had net deferred tax assets of approximately $1.5 million and approximately $2.4 million, respectively.


In Fiscal 2017 we recognized an income tax net provision of approximately $1.0 million based on our net income before income tax provision $2.7 million and our effective tax rate of 37.3% Given the past six years of profitability, management’s assessment of the current business climate and expected future profits, it is more likely than not that all of the deferred tax assets will be realized before they expire.

In Fiscal 2016 we recognized an income tax net benefit of approximately $0.1 million consisting of an income tax provision of approximately $0.6 million based on our net income before income tax (provision) benefit of approximately $1.7 million and our effective tax rate of 37.8% offset by the reversal of the remaining valuation allowance of approximately $0.8 million.

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 $1.7 million in both Fiscal 2017 and Fiscal 2016.

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