NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet of Koss Corporation (the "Company") as of
June 30, 2016
, has been derived from audited financial statements. The unaudited condensed consolidated financial statements presented herein are based on interim amounts. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The operating results for the
nine months ended March 31, 2017
, are not necessarily indicative of the operating results that may be experienced for the full fiscal year ending
June 30, 2017
.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2016
.
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
three and nine months ended March 31, 2017 and 2016
, the costs incurred were for legal fees related to claims initiated against third parties (see Note
12
). For the
three and nine months ended March 31, 2017 and 2016
, the costs and recoveries were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31
|
|
March 31
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Legal fees incurred
|
|
$
|
40,000
|
|
|
$
|
1,639,074
|
|
|
$
|
77,500
|
|
|
$
|
1,714,074
|
|
Gross proceeds from the settlement of the third party lawsuit
|
|
—
|
|
|
(3,000,000
|
)
|
|
—
|
|
|
(3,000,000
|
)
|
Proceeds from asset forfeitures
|
|
(337
|
)
|
|
(25
|
)
|
|
(3,741
|
)
|
|
(75
|
)
|
Unauthorized transaction related costs (recoveries),
net
|
|
$
|
39,663
|
|
|
$
|
(1,360,951
|
)
|
|
$
|
73,759
|
|
|
$
|
(1,286,001
|
)
|
3.
INVENTORIES
The components of inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
June 30, 2016
|
Raw materials
|
|
$
|
2,936,032
|
|
|
$
|
3,466,907
|
|
Work-in process
|
|
5,098
|
|
|
—
|
|
Finished goods
|
|
7,852,277
|
|
|
7,570,026
|
|
|
|
10,793,407
|
|
|
11,036,933
|
|
Allowance for obsolete inventory
|
|
(2,839,133
|
)
|
|
(2,441,448
|
)
|
Total inventories
|
|
$
|
7,954,274
|
|
|
$
|
8,595,485
|
|
4.
INCOME TAXES
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, 2013 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, 2013 and forward. For the
three and nine months ended March 31, 2017
, the Company recorded an income tax expense of
$62,523
and
$188,948
, respectively, compared to income tax expense of
$497,865
and
$685,310
for the
three and nine months ended March 31, 2016
, respectively. The Company received income tax refunds of
$530,446
during the
three and nine months ended March 31, 2017
.
During the
three and nine months ended March 31, 2017
, the Company increased the valuation allowance by
$444,000
due to certain indications that the full benefit of the related deferred income tax assets may not be realized.
The Company does not believe it has any unrecognized tax benefits as of
March 31, 2017
and as of
June 30, 2016
. Any changes to the Company’s unrecognized tax benefits as of
March 31, 2017
, if recognized, would impact the effective tax rate.
5.
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. On October 31, 2016, the Credit Agreement was amended to amend certain reporting requirements. 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 of up to a sublimit of
$2,000,000
and subject to certain other limitations. The loan 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. The Company is currently in compliance with all covenants related to the Credit Facility. As of
March 31, 2017
and
June 30, 2016
, there were no outstanding borrowings on the facility.
The Company incurs interest expense primarily related to its secured credit facility. Interest expense was
$964
and
$6,075
for the
nine months ended March 31, 2017 and 2016
, respectively. There was no interest expense for the
three months ended March 31, 2017
and
2016
.
6.
ACCRUED LIABILITIES
Accrued liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
June 30, 2016
|
Cooperative advertising and promotion allowances
|
|
$
|
453,374
|
|
|
$
|
479,645
|
|
Product warranty obligations
|
|
240,081
|
|
|
305,275
|
|
Customer credit balances
|
|
50,375
|
|
|
47,753
|
|
Current deferred compensation
|
|
150,000
|
|
|
150,000
|
|
Accrued returns
|
|
42,669
|
|
|
140,918
|
|
Employee benefits
|
|
55,443
|
|
|
83,113
|
|
Legal and professional fees
|
|
75,750
|
|
|
127,329
|
|
Management bonuses and profit-sharing
|
|
12,000
|
|
|
132,950
|
|
Sales commissions and bonuses
|
|
92,104
|
|
|
84,550
|
|
Other
|
|
91,719
|
|
|
50,119
|
|
Total accrued liabilities
|
|
$
|
1,263,515
|
|
|
$
|
1,601,652
|
|
7.
(LOSS) INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE
Basic (loss) 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 periods ended
March 31, 2017
and
2016
. When dilutive, stock options are included in (loss) income per share as share equivalents using the treasury stock method. For the periods ended
March 31, 2017
and
2016
, 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 (loss) income per share. Shares issuable upon the exercise of outstanding options of
2,345,000
and
2,150,000
were excluded from the diluted weighted-average common shares outstanding for the periods ended
March 31, 2017
and
2016
, respectively, as they would be anti-dilutive.
8.
STOCK OPTIONS
The Company recognizes stock-based compensation expense for options granted under both the 1990 Flexible Incentive Plan and the 2012 Omnibus Incentive Plan. The stock-based compensation relates to stock options granted to employees, non-employee directors and non-employee consultants. In the
nine months ended March 31, 2017
, options to purchase
485,000
shares were granted under the 2012 Omnibus Incentive Plan at a weighted average exercise price of
$2.33
. In the
nine months ended March 31, 2016
, options to purchase
410,000
shares were granted under the 2012 Omnibus Incentive Plan at a weighted average exercise price of
$2.72
. Stock-based compensation expense during the
three and nine months ended March 31, 2017
was
$88,523
and
$265,568
, respectively. Stock-based compensation expense during the
three and nine months ended March 31, 2016
was
$121,257
and
$366,665
, respectively.
9.
ADDITIONAL CASH FLOW INFORMATION
The net changes in cash as a result of changes in operating assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
March 31
|
|
|
2017
|
|
2016
|
Accounts receivable
|
|
$
|
585,803
|
|
|
$
|
(691,504
|
)
|
Inventories
|
|
641,211
|
|
|
(724,844
|
)
|
Income taxes receivable
|
|
529,378
|
|
|
(167,927
|
)
|
Prepaid expenses and other current assets
|
|
(93,147
|
)
|
|
33,581
|
|
Accounts payable
|
|
(551,606
|
)
|
|
(291,981
|
)
|
Accrued liabilities
|
|
(338,137
|
)
|
|
176,723
|
|
Other liabilities
|
|
(11,656
|
)
|
|
(34,745
|
)
|
Net change
|
|
$
|
761,846
|
|
|
$
|
(1,700,697
|
)
|
|
|
|
|
|
Net cash paid (refunded) during the period for:
|
|
|
|
|
|
|
Income taxes
|
|
$
|
(523,342
|
)
|
|
$
|
557,751
|
|
Interest
|
|
$
|
964
|
|
|
$
|
6,075
|
|
10.
STOCKHOLDERS' EQUITY
The following table summarizes the changes in stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
March 31
|
|
|
2017
|
|
2016
|
Net (loss) income
|
|
$
|
(893,259
|
)
|
|
$
|
1,155,513
|
|
Stock-based compensation expense
|
|
265,568
|
|
|
366,665
|
|
(Decrease) increase in stockholders' equity
|
|
$
|
(627,691
|
)
|
|
$
|
1,522,178
|
|
11.
COMMITMENTS AND CONTINGENCIES
The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly-owned by the former Chairman. On
January 5, 2017
, the lease was renewed for a period of
five
years, ending
June 30, 2023
, 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.
12.
LEGAL MATTERS
As of
March 31, 2017
, 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 case remains on appeal.
|
The ultimate resolution of this matter is not determinable unless otherwise noted.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and possible litigation and assumptions relating to the foregoing. In addition, when used in this Form 10-Q, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “may,” “will,” “should,” “forecasts,” “predicts,” “potential,” “continue” and variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this Form 10-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, but are not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, the receptivity of consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition, pricing, the number and nature of customers and their product orders, production by third party vendors, foreign manufacturing, sourcing, and sales (including foreign government regulation, trade and importation concerns), borrowing costs, changes in tax rates, pending or threatened litigation and investigations, and other risk factors which may be detailed from time to time in the Company’s Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect new information.