NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS — Koss Corporation ("Koss"), a Delaware corporation, and its
100%
-owned subsidiary (collectively the "Company"), reports its finances as a single reporting segment, as the Company’s principal business line is the design, manufacture and sale of stereo headphones and related accessories. The Company leases its plant and office in Milwaukee, Wisconsin. The domestic market is served by domestic sales representatives and independent manufacturers' representatives working directly with certain retailers, distributors, and original equipment manufacturers. International markets are served by domestic sales representatives and sales offices in the Netherlands and Russia which utilize independent distributors in several foreign countries. The Company has one subsidiary, Koss U.K. Limited ("Koss UK"), which was formed to comply with certain European Union ("EU") requirements. Koss UK is non-operating and holds no assets.
BASIS OF CONSOLIDATION — The consolidated financial statements include the accounts of Koss and its subsidiary, Koss UK, which is a
100%
-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION — The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; shipment and delivery have occurred; the seller’s price to the buyer is fixed and determinable; and collectibility is reasonably assured. When these criteria are generally satisfied, the Company recognizes revenue. The Company also offers certain customers the right to return products that do not meet the standards agreed with the customer. The Company continuously monitors such product returns and cannot guarantee that they will continue to experience the same return rates that they have experienced in the past. The Company records a provision for estimated returns based on prior product rates of return. Any significant increase in product quality failure rates and the resulting credit returns could have a material adverse impact on the Company’s operating results for the period or periods in which such returns materialize.
The Company provides for certain sales incentives. The Company records a provision for estimated incentives based upon the incentives offered to customers on product related sales in the same period as the related revenues are recorded. The provision is recorded as a reduction of sales. The Company also records a provision for estimated sales returns and allowances on product related sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, adjustments may be required in future periods.
SHIPPING AND HANDLING FEES AND COSTS — Shipping and handling costs charged to customers have been included in net sales. Shipping and handling costs incurred by the Company have been included in cost of goods sold.
RESEARCH AND DEVELOPMENT — Research and development activities charged to operations as a component of selling, general and administrative expenses in the accompanying Consolidated Statements of Income amounted to
$91,259
in fiscal year
2016
. There were no research and development activities charged to operations in fiscal year
2015
.
ADVERTISING COSTS — Advertising costs included within selling, general and administrative expenses in the accompanying Consolidated Statements of Income were
$143,518
in
2016
and
$154,505
in
2015
. Such costs are expensed as incurred.
INCOME TAXES — The Company operates as a C Corporation under the Internal Revenue Code of 1986, as amended (the "Code"). Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes. The differences relate principally to different methods used for depreciation and amortization for income tax purposes, net operating losses, capitalization requirements of the Code, allowances for doubtful accounts, provisions for excess and obsolete inventory, stock-based compensation, warranty reserves, and other income tax related carryforwards. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.
INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE — Income per common and common stock equivalent share is calculated under the provisions of Topic 260 in the Accounting Standards Codification ("ASC") which provides for calculation of “basic” and “diluted” income per share. Basic income per common and common stock equivalent share includes no dilution and is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted income per common and common stock equivalent share reflects the potential dilution of securities that could share in the earnings of an entity. See Note
11
for additional information on income per common and common stock equivalent share.
CASH AND CASH EQUIVALENTS — The Company considers depository accounts and investments with a maturity at the date of acquisition and expected usage of three months or less to be cash and cash equivalents. The Company maintains its cash on deposit at a commercial bank located in the United States of America. The Company periodically has cash balances in excess of insured amounts. The Company has not experienced and does not expect to incur any losses on these deposits.
ACCOUNTS RECEIVABLE — Accounts receivable consists of unsecured trade receivables due from customers. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due item and general economic conditions. See Note
3
for additional information on accounts receivable.
INVENTORIES — The Company’s inventory is valued at the lower of last-in, first-out ("LIFO") cost or market. The carrying value of inventory is reviewed for impairment on at least a quarterly basis or more frequently if warranted due to changes in market conditions. See Note
4
for additional information on inventory.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS — Equipment and leasehold improvements are stated at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Major expenditures for property and equipment and significant renewals are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation and amortization are removed from the accounts and any resulting gains or losses are included in operations.
LIFE INSURANCE POLICIES — Life insurance policies are stated at cash surrender value or at the amount the Company would receive in the case of split-dollar arrangements. Increases in cash surrender value are included in selling, general and administrative expenses in the Consolidated Statements of Income, which is where the annual premiums are recorded.
PRODUCT WARRANTY OBLIGATIONS — Estimated future warranty costs related to products are charged to cost of goods sold during the period the related revenue is recognized. The product warranty liability reflects the Company’s best estimate of probable obligations under those warranties. See Note
9
for additional information on product warranty obligations.
DEFERRED COMPENSATION — The Company’s deferred compensation liabilities are for a current and former officer and are calculated based on compensation, years of service and mortality tables. The related expense is calculated using the net present value of the expected payments and is included in selling, general and administrative expenses in the Consolidated Statements of Income. See Note
10
for additional information on deferred compensation.
FAIR VALUE OF FINANCIAL INSTRUMENTS — Cash equivalents, accounts receivable and accounts payable approximate fair value based on the short maturity of these instruments.
IMPAIRMENT OF LONG-LIVED ASSETS — The Company evaluates the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company evaluates the recoverability of equipment and leasehold improvements annually or more frequently if events or circumstances indicate that an asset might be impaired. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using a undiscounted future cash flow analysis or other accepted valuation techniques. No impairments of the Company's long-lived assets were recorded in the years ended
June 30, 2016
and
2015
.
LEGAL COSTS — All legal costs related to litigation are charged to operations as incurred, except settlements, which are expensed when a claim is probable and can be estimated. Recoveries of legal costs are recorded when the amount and items to be paid are confirmed by the insurance company. Proceeds from the settlement of legal disputes are recorded in income when the amounts are determinable and the collection is certain.
STOCK-BASED COMPENSATION — The Company has a stock-based employee compensation plan, which is described more fully in Note
12
. The Company accounts for stock-based compensation in accordance with ASC 718 "Compensation - Stock Compensation". Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period.
NEW ACCOUNTING PRONOUNCEMENTS — Accounting Standards Update ("ASU") No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, is part of the Financial Accounting Standards Board ("FASB") simplification initiative. This update requires deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position. The Company adopted this update retrospectively during the year ended
June 30, 2016
and has reflected the change on the Consolidated Balance Sheets. The adoption of this ASU had no impact on the valuation of the Company's deferred tax assets and liabilities, only the classification of the items on the Consolidated Balance Sheets.
USE OF ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS — Certain amounts previously reported have been reclassified to conform to the current presentation.
2.
UNAUTHORIZED TRANSACTION RELATED COSTS AND RECOVERIES
In December 2009, the Company learned of significant unauthorized transactions as previously reported. The Company has ongoing costs and recoveries associated with the unauthorized transactions. For the
fiscal years ended June 30, 2016 and 2015
, the costs incurred were for legal fees related to claims initiated against third parties (see Note
18
). During the year ended
June 30, 2016
, the Company had net recoveries as a result of settling one of its claims for a gross amount of
$3,000,000
. For the
fiscal years ended June 30, 2016 and 2015
, the costs and recoveries were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Legal fees incurred
|
|
$
|
1,714,074
|
|
|
$
|
152,492
|
|
Gross proceeds from the settlement of the third party lawsuit
|
|
(3,000,000
|
)
|
|
—
|
|
Proceeds from asset forfeitures
|
|
(75
|
)
|
|
(121,465
|
)
|
Unauthorized transaction related (recoveries) costs, net
|
|
$
|
(1,286,001
|
)
|
|
$
|
31,027
|
|
3.
ACCOUNTS RECEIVABLE
Accounts receivable includes unsecured trade receivables due from customers. The Company performs credit evaluations of its customers and does not require collateral to establish an account receivable. Accounts receivable from the Company's two largest customers represented approximately
18%
and
26%
of trade account receivables as of
June 30, 2016
and
2015
, respectively.
The Company evaluates collectibility of accounts receivable based on a number of factors. Accounts receivable are considered to be past due if unpaid one day after their due date. An allowance for doubtful accounts is recorded for past due receivable balances based on a review of the past due item and general economic conditions. The Company writes off accounts receivable when they become uncollectible. Changes in the allowance for doubtful accounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
|
Balance,
beginning
of year
|
|
Provision
charged to
expense
|
|
Amounts
written-off
|
|
Recoveries of previously written-off
|
|
Balance,
end of year
|
2016
|
|
$
|
26,052
|
|
|
28,514
|
|
|
(447
|
)
|
|
1,056
|
|
|
$
|
55,175
|
|
2015
|
|
$
|
20,501
|
|
|
25,725
|
|
|
(20,174
|
)
|
|
—
|
|
|
$
|
26,052
|
|
The vast majority of international customers, outside of Canada, purchase products on a cash against documents or cash in advance basis. Approximately
28%
and
5%
of the Company's trade accounts receivable at
June 30, 2016
and
2015
, were foreign receivables denominated in U.S. dollars.
4.
INVENTORIES
As of
June 30, 2016
and
2015
, the Company’s inventory was valued using the lower of last-in, first-out (“LIFO”) cost or market. If the first-in, first-out (“FIFO”) method of inventory accounting had been used by the Company for inventories valued at LIFO, inventories would have been
$471,174
and
$753,439
higher than reported at
June 30, 2016
and
2015
, respectively.
The components of inventories at
June 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Raw materials
|
|
$
|
3,466,907
|
|
|
$
|
5,374,333
|
|
Finished goods
|
|
7,570,026
|
|
|
6,246,072
|
|
|
|
11,036,933
|
|
|
11,620,405
|
|
Reserve for obsolete inventory
|
|
(2,441,448
|
)
|
|
(4,437,965
|
)
|
Total inventories
|
|
$
|
8,595,485
|
|
|
$
|
7,182,440
|
|
5.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The major categories of equipment and leasehold improvements at
June 30, 2016
and
2015
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
useful lives
|
|
2016
|
|
2015
|
Machinery and equipment
|
|
5-10 years
|
|
$
|
592,189
|
|
|
$
|
642,200
|
|
Furniture and office equipment
|
|
5-10 years
|
|
373,716
|
|
|
374,616
|
|
Tooling
|
|
5 years
|
|
4,299,776
|
|
|
4,126,850
|
|
Display booths
|
|
5 years
|
|
253,680
|
|
|
287,180
|
|
Computer equipment
|
|
3-5 years
|
|
768,620
|
|
|
1,414,517
|
|
Leasehold improvements
|
|
3-15 years
|
|
2,387,626
|
|
|
2,308,246
|
|
Assets in progress
|
|
N/A
|
|
210,189
|
|
|
60,600
|
|
|
|
|
|
8,885,796
|
|
|
9,214,209
|
|
Less: accumulated depreciation and amortization
|
|
|
|
7,371,324
|
|
|
7,621,689
|
|
Equipment and leasehold improvements, net
|
|
|
|
$
|
1,514,472
|
|
|
$
|
1,592,520
|
|
6.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes. The liability method measures the expected income tax impact of future taxable income and deductions implicit in the Consolidated Balance Sheets. The income tax provision in
2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
169,350
|
|
|
$
|
(100,126
|
)
|
State
|
|
2,675
|
|
|
(167,282
|
)
|
Deferred
|
|
702,013
|
|
|
284,783
|
|
Total income tax provision
|
|
$
|
874,038
|
|
|
$
|
17,375
|
|
The
2016
and
2015
tax results in an effective rate different than the federal statutory rate because of the following:
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2016
|
|
2015
|
Federal income tax expense at statutory rate
|
|
$
|
769,433
|
|
|
$
|
169,996
|
|
State income tax expense (benefit), net of federal income tax benefit
|
|
91,660
|
|
|
(21,442
|
)
|
Decrease in valuation allowance
|
|
(370,000
|
)
|
|
—
|
|
Stock-based compensation
|
|
447,180
|
|
|
53,596
|
|
Adjustments for unrecognized tax benefits
|
|
—
|
|
|
(175,000
|
)
|
Other
|
|
(64,235
|
)
|
|
(9,775
|
)
|
Total income tax provision
|
|
$
|
874,038
|
|
|
$
|
17,375
|
|
Temporary differences which give rise to deferred income tax assets and liabilities at
June 30, 2016
and
June 30, 2015
include:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred income tax assets:
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
864,954
|
|
|
$
|
835,270
|
|
Stock-based compensation
|
|
603,159
|
|
|
889,325
|
|
Accrued expenses and reserves
|
|
1,390,910
|
|
|
2,075,601
|
|
Federal and state net operating loss carryforwards
|
|
418,296
|
|
|
463,237
|
|
Valuation allowance
|
|
(409
|
)
|
|
(370,409
|
)
|
Equipment and leasehold improvements
|
|
—
|
|
|
11,566
|
|
Other
|
|
5,979
|
|
|
14,650
|
|
Total deferred income tax assets
|
|
3,282,889
|
|
|
3,919,240
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
Equipment and leasehold improvements
|
|
(67,390
|
)
|
|
—
|
|
Other
|
|
(2,943
|
)
|
|
(4,671
|
)
|
Net deferred income tax assets
|
|
$
|
3,212,556
|
|
|
$
|
3,914,569
|
|
Deferred income tax balances reflect the effects of temporary differences between the tax bases of assets and liabilities and their carrying amounts. These differences are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. The recognition of these deferred tax balances will be realized through normal recurring operations and, as such, the Company has recorded the full value of such expected benefits. The Company has no federal net operating loss carryforwards as of
June 30, 2016
. The Company has net operating loss carryforwards in the state of Wisconsin totaling
$5,892,509
which expire in fiscal years
2030
through
2035
. In addition, the Company has operating loss carryforwards in other states totaling
$324,326
, which expire in fiscal years
2026
through
2035
.
ASC Topic 740 "Income Taxes" prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. There were no additional significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s consolidated financial statements for the year ended
June 30, 2016
.
Additionally, ASC Topic 740 provides guidance on the recognition of interest and penalties related to income taxes. No interest or penalties related to income taxes has been accrued or recognized as of and for the years ended
June 30, 2016
and
2015
. The Company records interest related to unrecognized tax benefits in interest expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Unrecognized tax benefits at beginning of year
|
|
$
|
—
|
|
|
$
|
175,000
|
|
Reductions based on settlements with taxing authorities
|
|
—
|
|
|
(175,000
|
)
|
Unrecognized tax benefits at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
In the fiscal year ended June 30, 2015, the Company settled its position with a state tax authority and reduced the unrecognized tax benefits to zero. The Company does not believe it has any unrecognized tax benefits as of
June 30, 2016
. Any changes to the Company's unrecognized tax benefits during the fiscal years ended
June 30, 2016
and
2015
would impact the effective tax rate.
The Company files income tax returns in the United States federal jurisdiction and in several state jurisdictions. The Company’s federal tax returns for tax years beginning July 1, 2012 or later are open. For states in which the Company files state income tax returns, the statute of limitations is generally open for tax years ended June 30, 2012 and forward.
The following are the changes in the valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Balance,
beginning
of year
|
|
Increase in
valuation
allowance
|
|
Release of
valuation
allowance
|
|
Balance,
end of year
|
2016
|
|
$
|
(370,409
|
)
|
|
—
|
|
|
370,000
|
|
|
$
|
(409
|
)
|
2015
|
|
$
|
(370,409
|
)
|
|
—
|
|
|
—
|
|
|
$
|
(370,409
|
)
|
7.
CREDIT FACILITY
On May 12, 2010, the Company entered into a secured credit facility ("Credit Agreement") with JPMorgan Chase Bank, N.A. (“Lender”). The Credit Agreement provided for an
$8,000,000
revolving secured credit facility with interest rates either ranging from
0.0%
to
0.75%
over the Lender’s most recently publicly announced prime rate or
2.0%
to
3.0%
over LIBOR, depending on the Company’s leverage ratio. The Company pays a fee of
0.3%
to
0.45%
for unused amounts committed in the credit facility. On July 23, 2014, the Credit Agreement was amended to reduce the facility to
$5,000,000
, subject to a borrowing base calculation as defined in the Credit Agreement, and to amend certain financial covenants. On May 31, 2016, the Credit Agreement was amended to extend the expiration to July 31, 2018, and to amend certain financial covenants. In addition to the revolving loans, the Credit Agreement also provides that the Company may, from time to time, request the Lender to issue letters of credit for the benefit of the Company up to a sublimit of
$2,000,000
and subject to certain other limitations. The loans may be used only for general corporate purposes of the Company.
The Credit Agreement contains certain affirmative, negative and financial covenants customary for financings of this type. The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, asset sales, sale and leaseback transactions and transactions with affiliates, among other restrictions. The financial covenants include minimum debt service coverage ratio requirements. The Company and the Lender also entered into the Pledge and Security Agreement dated May 12, 2010, under which the Company granted the Lender a security interest in substantially all of the Company’s assets in connection with the Company’s obligations under the Credit Agreement. As of
June 30, 2016
and
2015
, there were no outstanding borrowings on the facility.
The Company incurs interest expense primarily related to its secured credit facility. Interest expense was
$6,075
and
$12,813
for the years ended
June 30, 2016
and
2015
, respectively.
8.
ACCRUED LIABILITIES
Accrued liabilities for the years ended
June 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Cooperative advertising and promotion allowances
|
|
$
|
479,645
|
|
|
$
|
400,114
|
|
Product warranty obligations
|
|
305,275
|
|
|
312,664
|
|
Customer credit balances
|
|
47,753
|
|
|
261,977
|
|
Current deferred compensation
|
|
150,000
|
|
|
150,000
|
|
Accrued returns
|
|
140,918
|
|
|
97,026
|
|
Employee benefits
|
|
83,113
|
|
|
93,568
|
|
Legal and professional fees
|
|
127,329
|
|
|
70,000
|
|
Management bonuses and profit-sharing
|
|
147,450
|
|
|
71,381
|
|
Sales commissions and bonuses
|
|
70,050
|
|
|
68,890
|
|
Other
|
|
50,119
|
|
|
49,407
|
|
|
|
$
|
1,601,652
|
|
|
$
|
1,575,027
|
|
9.
PRODUCT WARRANTY OBLIGATIONS
The Company records a liability for product warranty obligations at the time of sale based upon historical warranty experience. The majority of the Company’s products carry a lifetime warranty. The Company also records a liability for specific warranty matters when they become known and are reasonably estimated. However, the Company is continuously releasing new and more complex and technologically advanced products. Even though some of these products have a shorter warranty period, it is at least reasonably possible that products could be released with certain unknown quality or design problems resulting in higher than expected warranty and related costs. These costs could have a materially adverse effect on the Company's results of operations and financial condition in the near term. The Company’s current and non-current product warranty obligations are included in accrued liabilities and other liabilities, respectively, in the Consolidated Balance Sheets.
Changes to the product warranty obligations for the years ended
June 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Balance,
beginning
of year
|
|
Provision
charged to
expense
|
|
Warranty
expenses
incurred
|
|
Balance,
end of year
|
2016
|
|
$
|
531,891
|
|
|
214,827
|
|
|
(263,188
|
)
|
|
$
|
483,530
|
|
2015
|
|
$
|
722,624
|
|
|
103,925
|
|
|
(294,658
|
)
|
|
$
|
531,891
|
|
10.
DEFERRED COMPENSATION
The Company has deferred compensation agreements with a former and current officer. The related expense is calculated using the net present value of the expected payments and is included in selling, general and administrative expenses in the Consolidated Statements of Income. The Company's current and non-current deferred compensation obligations are included in accrued liabilities and deferred compensation, respectively, in the Consolidated Balance Sheets. The net present value was calculated for the former officer using a discount factor of
2.60%
and
2.70%
as of
June 30, 2016
and
2015
, respectively. The net present value was calculated for the current officer using a discount factor of
4.80%
and
4.80%
at
June 30, 2016
and
2015
, respectively.
The Board of Directors entered into an agreement to continue the 1991 base salary of the former chairman for the remainder of his life. These payments began in the fiscal year ended June 30, 2015, and payments of
$150,000
and
$50,000
were made under this arrangement for the years ended
June 30, 2016
and
2015
, respectively. The Company has a deferred compensation liability of
$772,026
and
$820,720
recorded as of
June 30, 2016
and
2015
, respectively. Deferred compensation expense of
$101,306
and
$166,414
was recognized under this arrangement in
2016
and
2015
, respectively.
The Board of Directors has approved a supplemental retirement plan with an officer that calls for annual cash compensation following retirement from the Company in an amount equal to
2%
of base salary, as defined in the agreement, multiplied by the number of years of service to the Company. The retirement payments are to be paid monthly to the officer until his death and then to his surviving spouse monthly until her death. The Company has a deferred compensation liability of
$1,565,688
and
$1,436,766
recorded as of
June 30, 2016
and
2015
, respectively. Deferred compensation expense of
$128,922
and a reversal of deferred compensation expense of
$179,019
was recognized under this arrangement in
2016
and
2015
, respectively.
The Company uses life insurance policies to provide funds to meet its deferred compensation obligations.
11.
INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE
Basic income per share is computed based on the weighted-average number of common shares outstanding. The weighted-average number of common shares outstanding was
7,382,706
for the years ended
June 30, 2016
and
2015
. When dilutive, stock options are included in income per share as share equivalents using the treasury stock method. For the years ended
June 30, 2016
and
2015
there were no common stock equivalents related to stock option grants that were included in the computation of the weighted-average number of shares outstanding for diluted income per share. Shares issuable upon the exercise of outstanding options of
2,140,000
and
2,245,000
were excluded from the diluted weighted average common shares outstanding for the years ended
June 30, 2016
and
2015
, respectively, as they would be anti-dilutive.
12.
STOCK OPTIONS
In 2012, pursuant to the recommendation of the Board of Directors, the stockholders ratified the creation of the Company’s 2012 Omnibus Incentive Plan (the “2012 Plan”), which superseded the 1990 Flexible Incentive Plan (the "1990 Plan"). The 2012 Plan is administered by a committee of the Board of Directors and provides for granting of various stock-based awards including stock options to eligible participants, primarily officers and certain key employees. A total of
2,000,000
shares of common stock were available under the terms of the 2012 Plan plus shares outstanding under the 1990 Plan which expire or are otherwise forfeited, canceled or terminated after July 25, 2012, the Effective Date of the 2012 Plan. As of
June 30, 2016
, there were
1,374,308
options available for future grants. Options vest over a
three
to
five
year period from the date of grant, with a maximum term of
five
to
ten
years.
The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model. The resulting compensation cost for fixed awards with graded vesting schedules is amortized on a straight-line basis over the vesting period for the entire award. The expected term of awards granted is determined based on historical experience with similar awards, giving consideration to the expected term and vesting schedules. The expected volatility is determined based on the Company’s historical stock prices over the most recent period commensurate with the expected term of the award. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected term of the award. Expected pre-vesting option forfeitures are based on historical data.
As of
June 30, 2016
, there was
$690,190
of total unrecognized compensation cost related to stock options granted under the 2012 Plan and 1990 Plan. This cost is expected to be recognized over a weighted average period of
2.30
years. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures. The Company recognized stock-based compensation expense of
$444,175
and
$630,539
in
2016
and
2015
, respectively. These expenses were included in selling, general and administrative expenses.
There was no cash received from stock option exercises during
2016
or
2015
.
Options are granted at a price equal to or greater than the market value of the common stock on the date of grant. The per share weighted average fair value of the stock options granted during the years ended
June 30, 2016
and
2015
were
$0.75
and
$0.73
, respectively. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. For the options granted in
2016
and
2015
, the Company used the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Expected stock price volatility
|
|
50
|
%
|
|
43
|
%
|
Risk free interest rate
|
|
1.48
|
%
|
|
1.52
|
%
|
Expected dividend yield
|
|
4.00
|
%
|
|
4.00
|
%
|
Expected forfeitures
|
|
5.60
|
%
|
|
1.50
|
%
|
Expected life of options
|
|
4.5 years
|
|
|
4.6 years
|
|
The following table identifies options granted, exercised, canceled, or available for exercise pursuant to the 1990 Plan and the 2012 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Stock
Options
Price Range
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life - Years
|
|
Aggregate
Intrinsic
Value of
In-The-
Money
Options
|
Shares under option at June 30, 2014
|
|
2,066,000
|
|
|
$3.90 - $13.09
|
|
$
|
5.97
|
|
|
4.13
|
|
$
|
—
|
|
Granted
|
|
470,000
|
|
|
$2.24 - $3.30
|
|
$
|
3.14
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
Expired
|
|
(201,000
|
)
|
|
$4.97 - $13.09
|
|
$
|
7.06
|
|
|
|
|
|
|
Forfeited
|
|
(90,000
|
)
|
|
$3.00 - $6.00
|
|
$
|
4.69
|
|
|
|
|
|
|
Shares under option at June 30, 2015
|
|
2,245,000
|
|
|
$2.24 - $13.09
|
|
$
|
5.33
|
|
|
3.69
|
|
$
|
1,676
|
|
Granted
|
|
410,000
|
|
|
$2.05 - $2.83
|
|
$
|
2.72
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
Expired
|
|
(458,000
|
)
|
|
$3.00 - $13.09
|
|
$
|
6.25
|
|
|
|
|
|
|
Forfeited
|
|
(57,000
|
)
|
|
$3.00 - $6.00
|
|
$
|
4.34
|
|
|
|
|
|
|
Shares under option at June 30, 2016
|
|
2,140,000
|
|
|
$2.05 - $9.74
|
|
$
|
4.66
|
|
|
3.51
|
|
$
|
—
|
|
Exercisable as of June 30, 2015
|
|
1,134,500
|
|
|
$3.90 - $13.09
|
|
$
|
6.01
|
|
|
2.18
|
|
$
|
—
|
|
Exercisable as of June 30, 2016
|
|
1,084,000
|
|
|
$2.24 - $9.74
|
|
$
|
5.57
|
|
|
2.47
|
|
$
|
—
|
|
A summary of intrinsic value and cash received from stock option exercises and fair value of vested stock options for the fiscal years ended
June 30, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Total intrinsic value of stock options exercised
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash received from stock option exercises
|
|
$
|
—
|
|
|
$
|
—
|
|
Total fair value of stock options vested
|
|
$
|
583,727
|
|
|
$
|
696,958
|
|
13.
STOCK REPURCHASE PROGRAM
The Company has an agreement with the former chairman, in the event of his death, at the request of the executor of his estate, to repurchase his Company common stock from his estate. The Company does not have the right to require the estate to sell stock to the Company. As such, this arrangement is accounted for as a written put option with the fair value of the put option recorded as a derivative liability.
As of
June 30, 2016
, the estate of the former chairman does not hold a material amount of Company stock. As such, there is no exposure that the executor of the former chairman's estate may require the Company to repurchase a material amount of stock in the event of his death. The repurchase price is
95%
of the fair market value of the common stock on the date that notice to repurchase is provided to the Company. The total number of shares to be repurchased will be sufficient to provide proceeds which are the lesser of
$2,500,000
or the amount of estate taxes and administrative expenses incurred by his estate. The Company may elect to pay the purchase price in cash or may elect to pay cash equal to
25%
of the total amount due and to execute a promissory note at the prime rate of interest for the balance payable over
four
years. The Company maintains a
$1,150,000
life insurance policy to fund a substantial portion of this obligation.
In April 1995, the Board of Directors approved a stock repurchase program authorizing the Company to purchase from time to time up to
$2,000,000
of its common stock for its own account. Subsequently, the Board of Directors periodically has approved increases in the amount authorized for repurchase under the program. As of
June 30, 2016
, the Board had authorized the repurchase of an aggregate of
$45,500,000
of common stock under the stock repurchase program, of which
$43,360,247
had been expended. No shares were repurchased in
2016
or
2015
.
14.
ADDITIONAL CASH FLOW INFORMATION
The net changes in cash as a result of changes in operating assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Accounts receivable
|
|
$
|
(735,388
|
)
|
|
$
|
311,182
|
|
Inventories
|
|
(1,413,045
|
)
|
|
(127,508
|
)
|
Income taxes receivable
|
|
(377,976
|
)
|
|
903,745
|
|
Prepaid expenses and other current assets
|
|
66,945
|
|
|
(199,844
|
)
|
Income taxes payable
|
|
—
|
|
|
(175,000
|
)
|
Accounts payable
|
|
(205,598
|
)
|
|
(292,501
|
)
|
Accrued liabilities
|
|
26,625
|
|
|
(2,428,446
|
)
|
Other liabilities
|
|
(40,972
|
)
|
|
(117,545
|
)
|
Net change
|
|
$
|
(2,679,409
|
)
|
|
$
|
(2,125,917
|
)
|
|
|
|
|
|
Net cash paid (refunded) during the year for:
|
|
|
|
|
|
|
Income taxes
|
|
$
|
558,202
|
|
|
$
|
(985,585
|
)
|
Interest
|
|
$
|
6,075
|
|
|
$
|
12,813
|
|
15.
EMPLOYEE BENEFIT PLANS
Substantially all domestic employees are participants in the Koss Employee Stock Ownership Trust (KESOT) under which an annual contribution in either cash or common stock may be made at the discretion of the Board of Directors. No contributions were made for the fiscal years
2016
or
2015
.
The Company maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees of the Company who have completed one full fiscal quarter of service. Matching contributions can be made at the discretion of the Board of Directors. For fiscal years
2016
and
2015
, the matching contribution was
50%
and
25%
of employee contributions to the plan, respectively. Vesting of Company contributions occurs immediately. Company contributions were
$186,877
and
$91,354
during
2016
and
2015
, respectively.
16.
FOREIGN SALES AND SIGNIFICANT CUSTOMERS
The Company’s net foreign sales amounted to
$10,504,583
during
2016
and
$7,450,744
during
2015
.
The Company’s sales by country were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
United States
|
|
$
|
15,496,763
|
|
|
$
|
16,779,312
|
|
Sweden
|
|
4,322,582
|
|
|
3,677,225
|
|
Czech Republic
|
|
1,231,731
|
|
|
441,754
|
|
Hong Kong
|
|
1,121,609
|
|
|
—
|
|
People's Republic of China
|
|
969,848
|
|
|
193,374
|
|
Malaysia
|
|
669,782
|
|
|
262,600
|
|
Canada
|
|
400,672
|
|
|
498,026
|
|
All other countries
|
|
1,788,359
|
|
|
2,377,765
|
|
Net sales
|
|
$
|
26,001,346
|
|
|
$
|
24,230,056
|
|
Sales during
2016
and
2015
to the Company's five largest customers, which are generally large national retailers or foreign distributors, represented approximately
47%
and
45%
of the Company's net sales, respectively. Included in these percentages were sales to a single Scandinavian distributor which represented approximately
17%
and
15%
of the Company's net sales during
2016
and
2015
, respectively. Net sales to a single United States customer represented approximately
11%
and
8%
of the Company's net sales during
2016
and
2015
, respectively.
17.
COMMITMENTS AND CONTINGENCIES
The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly-owned by the former chairman. On
May 15, 2012
, the lease was renewed for a period of
five
years, ending
June 30, 2018
, and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of
$380,000
per year. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership. Total rent expense was
$380,000
in both
2016
and
2015
.
18.
LEGAL MATTERS
As of
June 30, 2016
, the Company is party to the following matter related to the unauthorized transactions described below:
|
|
•
|
On December 17, 2010, the Company filed an action against Park Bank in Circuit Court of Milwaukee County, Wisconsin alleging a claim of breach of the Uniform Fiduciaries Act relating to the unauthorized transactions, as previously reported. In 2015, Park Bank filed third party claims based on contribution and subrogation against Grant Thornton LLP and Michael Koss. The Court granted motions to dismiss the contribution claims against Grant Thornton LLP and Michael Koss, but determined that it was premature to decide the subrogation claims at this stage of the proceedings. On or around March 11, 2016, the Court entered an order granting Park Bank's motion for summary judgment that dismissed the case. On March 22, 2016, the Company filed a Notice of Appeal that appeals the order granting Park Bank's motion for summary judgment and the Court's denial of the motion to dismiss the subrogation claims.
|
The ultimate resolution of this matter is not determinable unless otherwise noted.
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving these claims against us, individually or in aggregate, will not have a material adverse impact on our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.