NOTE 16 – RELATED PARTY TRANSACTIONS

TRADE

Approximately 20% of our karaoke products in Fiscal 2015 were produced by factories owned by the Shihua Group and we anticipate that approximately 20% of our karaoke products will be manufactured by the Starlight R&D Ltd. in Fiscal 2016. Starlight R&D Ltd. has verbally agreed to manufacture our karaoke products without requiring prepayment from us and will instead assume the cost of manufacturing the products until such time as we are paid by the customers who are purchasing those products from us.

During Fiscal 2015 and 2014 the Company sold approximately $285,000 and $1,861,000, respectively to Star Light Electronics Company, Ltd. (“SLE”), a related company, for direct shipments to Cosmo Communications of Canada, Ltd (“Cosmo”), another related company, at discounted pricing granted to major distributors. These goods were sold at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to SLE for Fiscal 2015 and 2014 was 16.5% and 14.8%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of income.

During Fiscal 2015 and 2014 the Company received approximately $181,000 and $0, respectively in licensing fees from SLE for sales of the Company’s products that were sold directly to Cosmo by SLE. These amounts were included as a component of net sales in the accompanying consolidated statements of income.

During Fiscal 2015 and 2014 we sold approximately $1,249,000 and $0, respectively of product to Winglight Pacific, Ltd. (“Winglight”) a related company, for direct shipment to Cosmo Communications of Canada, Ltd (“Cosmo”), another related company, at discounted pricing granted to major distributors. These goods were sold at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to SLE for Fiscal 2015 and 2014 was 16.2% and 0%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of income.

During Fiscal 2015 and 2014 we sold approximately $272,000 and $1,318,000, respectively of product to Cosmo from our California warehouse facility. These goods were sold at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Cosmo yielded 17.9% and 16.2%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of income.

During Fiscal 2015 and 2014 we purchased products from Starlight Consumer Electronics USA, Inc, (“Starlight USA) an indirect wholly-owned subsidiary of the Shihua Group of approximately $1,640,000 and $8,012,000, respectively. These amounts were included as a component of cost of goods sold in the accompanying consolidated statements of income. The goods were sold to the Company at net 60 day terms with interest of 6% per annum assessed on amounts past due on Fiscal 2015 invoices. For Fiscal 2015 and 2014 the Company incurred approximately $4,000 and $0 of interest expense related to past due invoices. These amounts were included as a component of other expenses in the accompanying consolidated statements of income

In Fiscal 2015 and Fiscal 2014, the Company purchased products from Star Fair Electronics Co., Ltd., a related company, of approximately $0 and $873,000, respectively. These amounts were included as a component of cost of goods sold in the accompanying consolidated statements of income.

In Fiscal 2015 and Fiscal 2014, the Company purchased products of approximately $4,626,000 and $0, respectively, from Starlight R&D These amounts were included as a component of cost of goods sold in the accompanying consolidated statements of income. In addition, the Company purchased services from Starlight R&D during Fiscal 2015 and 2014 of approximately $49,000 and $2,000, respectively. These amounts were included as a component of general and administrative expenses in the accompanying consolidated statements of income. The goods and services were sold to the Company at net 60 day terms with interest of 6% per annum assessed on amounts past due on Fiscal 2015 invoices. For Fiscal 2015 and 2014 the Company incurred approximately $18,000 and $0 of interest expense related to past due invoices.

During the fiscal years ended March 31, 2015 and 2014, we paid approximately $144,000 and $145,000 respectively to SLE as reimbursement for engineering and quality control services performed on our behalf in China. During the fiscal years ended March 31, 2015 and 2014, the Company received $60,000 from Starlight USA as reimbursement for customer support services performed by the Company on behalf of Starlight USA. These expense reimbursements were included in general and administrative expenses on our consolidated statements of operations.

Effective April 1, 2014, SMC-L entered into a service and logistics agreement with Starlight Consumer Electronics (USA), Inc. (“Starlight USA”), an indirect wholly-owned subsidiary of Shihua), Cosmo and SLE to provide logistics, fulfillment, and warehousing services for Starlight USA, Cosmo, and SLE’s domestic sales. For these services, Starlight USA, Cosmo and SLE have agreed to reimburse the Company for actual warehouse space occupied by these companies at $8 per pallet and for logistics services performed based on an agreed to fee schedule specified in the agreement. For Fiscal 2015 and 2014 the Company received approximately $141,000 and $0 respectively. These amounts were included as a component of general and administrative expenses in the accompanying consolidated statements of income.

Effective April 1, 2013, SMC-L entered into a service and logistics agreement with Starlight USA, Cosmo and SLE, to provide logistics, fulfillment, and warehousing services for Starlight USA, Cosmo and SLE’s domestic sales. For these services, Starlight USA, Cosmo and SLE have agreed to reimburse the Company for actual warehouse space occupied by these companies at $0.50 per square foot and for logistics services performed based on an agreed to fee schedule specified in the agreement. The Company received approximately $0 and $330,000 in service fees from these affiliates during the twelve months ended March 31, 2015 and March 31, 2014, respectively. These amounts were included as a component of general and administrative expenses in the accompanying consolidated statements of income.

Subsequent to our fiscal year ended March 31, 2015, SMC-L renewed a service and logistics agreement with Starlight USA, Cosmo and SLE, to provide logistics, fulfillment, and warehousing services for Starlight USA, Cosmo and SLE’s domestic sales effective April 1, 2015. For these services, Starlight USA, Cosmo and SLE have agreed to reimburse the Company for actual warehouse space occupied by these companies at $0.096 per cubic foot and for logistics services performed based on an agreed to fee schedule specified in the agreement. The Company estimates it will receive approximately $100,000 in expense reimbursements during Fiscal FY2016 related to this agreement.