3.	REVENUE RECOGNITION

Revenues from product sales are recognized when the customer obtains control of the product, which typically occurs upon shipment from the Company's facility. There are a very limited number of customers for which control does

not

pass until they have received the products at their facility. Revenue from product sales is adjusted for estimated warranty obligations and variable consideration, which are detailed below. In

May 2014,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

2014

(Topic

606

), Revenue from Contracts with Customers. This new standard supersedes nearly all existing revenue recognition guidance and provides a

five

-step analysis to determine when and how revenue is recognized. The underlying principle is to recognize revenue when promised goods or services transfer to the customer. The amount of revenue recognized is to reflect the consideration expected to be received for those goods or services. The Company adopted the requirements of the new standard on

July 1, 2018

using the full retrospective transition method. Prior period Consolidated Financial Statements were restated to reflect full retrospective adoption.

Warranties

- The Company offers a lifetime warranty to consumers in the United States and certain other countries. This lifetime warranty creates a future performance obligation. The Company

determine the standalone selling price for

this performance obligation using the cost plus method. There are also certain foreign distributors that receive warranty repair parts and replacement headphones to satisfy warranty obligations in those countries. The Company defers revenue to recognize the future obligations related to these warranties. The deferred revenue is based on historical analysis of warranty claims relative to sales. This deferred revenue reflects the Company's best estimates of the amount of warranty returns and repairs it will experience during those future periods. If future warranty activity varies from the estimates, the Company will adjust the estimated deferred revenue, which would affect net sales and operating results in the period that such adjustment becomes known. The Company typically receives payment for product at the time of shipment or under normal collection terms. The Company estimates that the warranty related performance obligation is satisfied within

one

three

years and therefore uses that same time frame for recognition of the deferred revenue.

Reserves for Variable Consideration

- Revenue from product sales is recorded at the net sales price, which includes estimates of variable consideration for which reserves are established and which result from returns, rebates, and co-pay assistance that are offered within contracts between the Company and its customers. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which it is entitled based on the terms of the contract. If actual results in the future vary from the estimates, the Company will adjust these estimates, which would affect net sales and operating results in the period such variances become known.

Product Returns

- The Company generally offers customers a limited right of return. The Company estimates the amount of product sales that

may

be returned by its customers and records the estimate as a reduction of revenue in the period the related product revenue is recognized. Product return liabilities are estimated using historical sales and returns information. If actual results in the future vary from the estimates, the Company will adjust these estimates, which would affect net sales and operating results in the period such variances become known.

Volume Rebates

- The Company offers volume rebates to certain customers in the United

States

and certain foreign distributors. These

volume rebates are tied to sales volume within specified periods. The amount of revenue is reduced for variable consideration related to customer rebates, which are calculated using expected values and is based on program specific factors such as expected rebate percentages and expected volumes. Changes in such accruals

may

be required if actual sales volume differs from estimated sales volume, which would affect net sales and operating results in the period such variances become known.

The cumulative effect of the changes made to our

June 30, 2018

Consolidated Balance Sheet

for the adoption of ASC

606

using the full retrospective method was as follows:

Balance Sheet	As Previously		New Revenue			As
June 30, 2018	Reported		Standard Adjustment			Adjusted
Current liabilities:
Accrued liabilities	$	1,178,571	$	(389,610	)	$	788,961
Deferred revenue		-		690,905			690,905

Long-term liabilities:
Other liabilities		155,702		(155,702	)		-
Deferred revenue		-		168,465			168,465

Equity:
Retained earnings	$	8,728,628	$	(314,058	)	$	8,414,570

The impact of adoption on our Consolidated Statement of Operations was as follows:

Statement of Operations	As Previously			New Revenue			As
Year ended June 30, 2018	Reported			Standard Adjustment			Adjusted
Net sales	$	23,515,441		$	7,190		$	23,522,631
Cost of goods sold		16,933,431			33,202			16,966,633
Income tax provision		3,042,696			(852	)		3,041,844
Net (loss)		(3,386,060	)		(25,160	)		(3,411,220	)

(Loss) per common share:
Basic	$	(0.46	)	$	-		$	(0.46	)
Diluted		(0.46	)		-			(0.46	)

The impact of adoption on our Consolidated Statement of Cash Flows was as follows:

Statement of Cash Flows	As Previously			New Revenue			As
Year ended June 30, 2018	Reported			Standard Adjustment			Adjusted
Operating activities:
Net (loss)	$	(3,386,060	)	$	(25,160	)	$	(3,411,220	)
Deferred income taxes		3,042,257			(852	)		3,041,405
Change in deferred revenue					15,638			15,638
Net changes in operating assets and liabilities		640,233			10,374			650,607
Cash provided by operating activities	$	1,031,087			-		$	1,031,087

Disaggregation of Revenue

The Company disaggregates it's net sales by geographical location as it believes it best depicts how the nature, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table summarizes net sales by geographical location

	2019			2018*
United States	$	15,255,741	$	16,584,115
Export		6,586,3 56		6,938,516
Net Sales	$	21,842,097	$	23,522,631

*As adjusted for the retrospective adoption of ASC

606