UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended June 30, 2019
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 0-3295
KOSS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
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39-1168275
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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4129 North Port Washington Avenue, Milwaukee, Wisconsin
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53212
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (414) 964-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock $0.005 par value per share
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The Nasdaq Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company ☒
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(Do not check if a smaller reporting company)
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Emerging growth company ☐
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common stock held by nonaffiliates of the registrant as of December 31, 2018, was approximately $4,995,005 (based on the $1.91 per share closing price of the Company’s common stock as reported on the NASDAQ Stock Market on December 31, 2018.
On August 19, 2019, there were 7,404,831 shares outstanding of the registrant’s common stock.
Documents Incorporated by Reference
Part III of this Form 10-K incorporates by reference information from Koss Corporation’s Proxy Statement for its 2019 Annual Meeting of Stockholders filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.
This Annual Report on Form 10-K 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-K 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-K, 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-K, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-K, 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.
PART I
GENERAL
As used herein unless the context otherwise requires, the term “Company” means Koss Corporation and its subsidiary, Koss U.K. Limited. The Company formed Koss U.K. Limited to comply with certain European Union ("EU") requirements. The entity is non-operating and holds no assets. The Company was incorporated in Delaware in 1971.
The Company operates in the audio/video industry segment of the home entertainment industry through its design, manufacture and sale of stereo headphones and related accessory products. The Company reports its results 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’s products are sold through national retailers, U.S. distributors, international distributors, audio specialty stores, the internet, direct mail catalogs, regional department store chains, discount department stores, grocery stores, electronics retailers, military exchanges and prisons under the “Koss” name as well as private label. The Company also sells products to distributors for resale to school systems, and directly to other manufacturers for inclusion with their own products. The Company has approximately 134 domestic dealers and its products are carried in approximately 9,093 domestic retail outlets and numerous retailers worldwide. International markets are served by domestic sales representatives and sales personnel in the Netherlands and Russia. The Company utilizes independent distributors in several foreign countries.
Approximately 81% of the Company’s fiscal year 2019 sales were from stereo headphones used for listening to music. The remaining 19% of the Company's sales were from headphones used in communications, education settings, and in conjunction with metal detectors, as well as to original equipment manufacturers ("OEM"). The products are not significantly differentiated by their retail sales channel or application with the exception of products sold to school systems, prisons, and OEM customers. There are no other product line differentiations other than the quality of the sound produced by the stereo headphone itself, which is highly subjective.
The Company sources complete stereo headphones manufactured to its specifications from various manufacturers in Asia as well as raw materials used to produce stereo headphones at its plant in Milwaukee, Wisconsin. Management believes that it has sources of complete stereo headphones and raw materials that are adequate for its needs.
There are no employment or compensation commitments between the Company and its dealers. The Company has several independent manufacturers’ representatives as part of its distribution efforts. The Company typically signs one year contracts with these manufacturers’ representatives. The arrangements with foreign distributors do not contemplate that the Company pays any compensation other than any profit the distributors make upon their sale of the Company’s products.
INTELLECTUAL PROPERTY
John C. Koss is recognized for creating the stereo headphone industry with the first SP/3 stereo headphone in 1958. The Company regularly applies for registration of its trademarks in many countries around the world, and over the years the Company has had numerous trademarks registered and patents issued in North America, South America, Asia, Europe, Africa, and Australia. The Company currently has 437 trademarks registered in 90 countries around the world and 224 patents in 25 countries. The Company has trademarks to protect the brand name, Koss, and its logo on its products. The Company also holds many design patents that protect the unique visual appearance of some of its products. These trademarks and patents are important to differentiate the Company from its competitors. Certain of the Company’s trademarks are of material value and importance to the conduct of its business. The Company considers protection of its proprietary developments important; however, the Company’s business is not, in the opinion of management, materially dependent upon any single trademark or patent. During the year ended June 30, 2019, the Company took additional steps to monitor and enforce its patents and trademarks to protect its intellectual property around the world.
SEASONALITY
Although retail sales of consumer electronics have typically been higher during the holiday season, stereo headphones have also seen increased purchases throughout the year. Management believes that the Company's business and industry segment are no longer seasonal as evidenced by the fact that net sales for the last couple of years, including the year ended June 30, 2019, were almost equally split between the first and second halves of the year. Management believes that the reason for this level performance of sales to retailers and distributors is related to the fact that consumers are increasingly purchasing stereo headphones throughout the year as replacements for older or lower quality headphones to improve the quality of their listening experience as it relates to portable electronic products. Therefore, upgrades and replacements appear to have as much interest over the course of the year as gifts of stereo headphones during the holiday season.
WORKING CAPITAL AND BACKLOG
The Company’s working capital needs do not differ substantially from those of its competitors in the industry and generally reflect the need to carry significant amounts of inventory to meet delivery requirements of its customers. From time to time, although rarely, the Company may extend payment terms to its customers for a special promotion. For instance, the Company has in the past offered a 90-120 day payment period for certain customers, such as computer retailers and office supply stores. Based on historical trends, management does not expect these practices to have a material effect on net sales or net income. The Company’s backlog of orders as of June 30, 2019, is not significant in relation to net sales during fiscal year 2019 or projected fiscal year 2020 net sales.
CUSTOMERS
The Company markets a line of products used by consumers to listen to music, sound bytes on computer systems, and other audio related media. The Company distributes these products through retail channels in the U.S. and independent distributors throughout the rest of the world. The Company markets its products through approximately 9,093 domestic retail outlets and numerous retailers worldwide. The Company also markets products directly to several original equipment manufacturers for use in their products. Sales to this customer base have been growing in recent years. The Company’s sales to its largest single customer, Wal-Mart, were approximately 18% and 21% of net sales in fiscal year 2019 and 2018, respectively. The Company is dependent upon its ability to retain a base of retailers and distributors to sell the Company’s line of products. Loss of retailers and distributors means loss of product placement. The Company has broad distribution across many channels including specialty stores, mass merchants, and electronics stores. Management believes that any loss of revenues would be partially offset by a corresponding decrease, on a percentage basis, in expenses, thereby partially reducing the impact on the Company’s income from operations. The five largest customers of the Company (including Wal-Mart in both years) accounted for approximately 45% and 47% of net sales in fiscal years 2019 and 2018, respectively.
COMPETITION
The Company focuses on the stereo headphone industry. In the stereo headphone market, the Company competes directly with approximately six major competitors, several of which are large and diversified and have greater total assets and resources than the Company. The extent to which retailers and consumers view the Company as an innovative vendor of high quality stereo headphone products, and a provider of excellent after-sales customer service, is the extent to which the Company maintains a competitive advantage. The Company relies upon its unique sound, quality workmanship, brand identification, engineering skills, and customer service to maintain its competitive position.
RESEARCH AND DEVELOPMENT
The amount expensed on engineering and research activities relating to the development of new products or the improvement of existing products was $ 334,789 during fiscal year 2019. These activities were conducted by both Company personnel and outside consultants. There was $ 427,009 in expenses for research and development activities during fiscal year 2018. The Company expects to incur research and development costs related to its Bluetooth® and traditional wired headphones during fiscal year 2020 as it is planning to introduce several new product offerings.
ENVIRONMENTAL MATTERS
The Company believes that it has materially complied with all currently existing federal, state and local statutes and regulations regarding environmental standards and occupational safety and health matters to which it is subject. During the fiscal years 2019 and 2018, the amounts incurred in complying with federal, state and local statutes and regulations pertaining to environmental standards and occupational safety and health laws and regulations did not materially affect the Company’s operating results or financial condition.
EMPLOYEES
As of June 30, 2019, the Company employed 34 non-union employees, 3 of which were part-time employees. The Company also engaged temporary personnel at times during the year ended June 30, 2019.
FOREIGN SALES
The Company’s competitive position and risks relating to its business in foreign markets are comparable to those in the domestic market. In addition, the governments of foreign nations may elect to erect trade barriers on imports. The creation of additional barriers would reduce the Company’s net sales and net income. In addition, any fluctuations in currency exchange rates could affect the pricing of the Company’s products and divert customers who might choose to purchase lower-priced, less profitable products, and could affect overall demand for the Company’s products. For further information, see Part II, Item 7.
The Company has sales personnel in the Netherlands and Russia to service the international export marketplace. Loss of these personnel would result in a transfer of sales and marketing responsibility. The Company sells its products to independent distributors in countries and regions outside the United States including Europe, the Middle East, Africa, Asia, Australia, South America, Latin America, the Caribbean, Canada and Mexico. During the last two fiscal years, net sales of all Koss products were distributed as follows:
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2019
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2018*
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United States
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$
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15,255,741
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$
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16,584,115
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Sweden
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1,841,402
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1,434,264
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All other countries
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1,341,878
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1,515,010
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Czech Republic
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1,208,893
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1,290,563
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People's Republic of China
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976,492
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1,604,506
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Russian Federation
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459,035
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486,153
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Australia
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415,080
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193,174
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Canada
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343,576
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414,846
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Net sales
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$
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21,842,097
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$
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23,522,631
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*As adjusted for the retrospective adoption of ASC 606
OPERATIONS
The Company has a manufacturing facility in Milwaukee, Wisconsin. The Company uses contract manufacturing facilities in the People's Republic of China and Taiwan. Since these independent suppliers are not located in the United States, the Company is at risk of business interruptions due to natural disasters, war, disease and government intervention through tariffs or trade restrictions that are of less concern domestically. The Company maintains finished goods inventory in its U.S. facility to mitigate this risk. The Company’s goal is to stock finished goods inventory at an average of approximately 90 days demand per item. Recovery of a single facility through replacement of a supplier in the event of a disaster or suspension of supply could take six to twelve months. The Company believes that it could restore production of its top ten selling models (which represent approximately 66% of the Company’s 2019 net sales) within twelve to eighteen months. Recent changes to compliance testing have impacted the time it takes to bring a product to market and would also impact the time necessary to retool a product and re-enter the marketplace. The Company is also at risk if trade restrictions are introduced on its products based upon country of origin. In addition, the Company may not be able to pass along most increases in tariffs and freight charges to the Company’s customers, which would directly affect profits.
CYBERSECURITY
The Company depends on information technology as an enabler to improve the effectiveness of its operations and to interface with its customers, as well as to maintain financial accuracy and efficiency. Information technology system failures, including suppliers’ or vendors’ system failures, could disrupt the Company’s operations by causing transaction errors, processing inefficiencies, delays or cancellation of customer orders, the loss of customers, impediments to the manufacture or shipment of products, other business disruptions, or the loss of or damage to intellectual property through security breach. The Company’s information systems, or those of its third-party service providers, could also be penetrated by outside parties intent on extracting information, corrupting information or disrupting business processes. Such unauthorized access could disrupt the Company’s business, increase costs and/or could result in the loss of assets. Cybersecurity attacks are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, corruption or destruction of data and other manipulation or improper use of systems or networks. These events could negatively impact the Company’s customers and/or reputation and lead to financial losses from remediation actions, loss of business, production downtimes, operational delays or potential liability, penalties, fines or other increases in expense, all of which may have a material adverse effect on the Company’s business. In addition, as security threats and cybersecurity and data privacy and protection laws and regulations continue to evolve and increase in terms of sophistication, we may invest additional resources in the security of our systems. Any such increased level of investment could adversely affect our financial condition or results of operations. The Company has programs in place to address and mitigate the cybersecurity risks. These programs include regular monitoring of outside threats, continuous updating of software to mitigate risk, education of employees to the risks of external threats, and simplification of infrastructure to minimize servers. The Company continues to minimize its risk by reducing the number of physical servers at the HQ location and further reducing the exposure of public systems. Planned e-commerce improvements will also reduce exposure. Operating systems are being updated to eliminate risks. More business critical systems are being moved to the cloud including email as well as reviewing options for ERP cloud deployment.
AVAILABLE INFORMATION
The Company’s internet website is https://www.koss.com. The Company makes available free of charge through its internet website the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to those reports as soon as reasonably practicable after they are electronically filed with (or furnished to) the Securities and Exchange Commission. These reports and other information regarding the Company are also available on the SEC’s internet website at https://www.sec.gov. The information on the Company's website is not part of this or any other report the Company files with or furnishes to the Securities and Exchange Commission.
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 extending the expiration to June 30, 2023. The lease extension maintained the rent at a fixed rate of $380,000 per year and it is being accounted for as an operating lease. The Company is responsible for all property maintenance, insurance, taxes, and other normal expenses related to ownership. All facilities are in good repair and, in the opinion of management, are suitable and adequate for the Company’s business purposes.
ITEM 3.
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LEGAL PROCEEDINGS.
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A description of these legal matters are included at Note of the Notes to Consolidated Financial Statements included herein, which description is incorporated herein by reference.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Koss Corporation and Subsidiary
Milwaukee, Wisconsin
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Koss Corporation and Subsidiary (the “Company”) as of June 30, 2019, and the related statements of operations, stockholders’ equity, and cash flows for the year ended June 30, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material aspects, the financial position of the Company as June 30, 2019 and the results of its operations and its cash flows for the year ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and the significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Adjustments to Prior Period Consolidated Financial Statements
As part of our audit of the 2019 consolidated financial statements, we also audited the adjustments to the 2018 consolidated financial statements to retrospectively apply the change in accounting as described in Notes 3 and 15. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to Koss Corporation and Subsidiary’s 2018 consolidated financial statements, which were audited by other auditors, other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance of the 2018 consolidated financial statements as a whole.
/s/ WIPFLI LLP
We have served as the Company’s auditor since 2019
Milwaukee, Wisconsin
August 30, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Koss Corporation and Subsidiary
Milwaukee, Wisconsin
Opinion on the Consolidated Financial Statements
We have audited, before the effects of the adjustments to retrospectively apply the changes in accounting described in Note 1 “Revenue Recognition”, “Inventories” and “Leases” and the related disclosures, the accompanying consolidated balance sheet of Koss Corporation and Subsidiary (the "Company") as of June 30, 2018, the related consolidated statements of operations, stockholders’ equity, and cash flows, for the year then ended, and the related notes (collectively referred to as the "consolidated financial statements"). The 2018 consolidated financial statements, before the effects of the adjustments discussed in Note 1, are not presented herein. In our opinion, the consolidated financial statements, before the effects of the adjustments to retrospectively apply the changes in accounting described in Note 1, present fairly, in all material respects, the financial position of the Company as of June 30, 2018, and the results of its operations and its cash flows the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments and the related disclosures to retrospectively apply the changes in accounting described in Note 1 “Revenue Recognition”, “Inventories” and “Leases” and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
We served as the Company's auditor from 2010 to 2018.
Milwaukee, Wisconsin
August 23, 2018
The accompanying notes are an integral part of these Consolidated Financial Statements.
The accompanying notes are an integral part of these Consolidated Financial Statements.
The accompanying notes are an integral part of these Consolidated Financial Statements.
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
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SIGNIFICANT ACCOUNTING POLICIES
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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 personnel 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 — 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”) 2014-09 (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. See Note 3 to the Consolidated Financial Statements for additional information on revenue recognition.
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 Operations amounted to $ 334,789 and $ 427,009 in 2019 and 2018 respectively.
ADVERTISING COSTS — Advertising costs included within selling, general and administrative expenses in the accompanying Consolidated Statements of Operations were $ 47,657 in 2019 and $ 65,279 in 2018. Such costs are expensed as incurred.
INCOME TAXES — The Company operates as a C Corporation under the Internal Revenue Code (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 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.
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 10 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.
— Effective June 30, 2019, the Company changed its accounting principle for inventory and discontinued the use of the last-in, first-out ("LIFO") method for inventory valuation and adopted the first-in, first-out ("FIFO") method of inventory. This change in accounting principle did not change the inventory valuation as of June 30, 2018 or June 30, 2019 as the LIFO reserve was $0 as of both dates. The results of operations for the years ended June 30, 2018 and June 30, 2019 were not impacted by discontinuing the use of LIFO since the LIFO reserve was reduced to $0 effective June 30, 2017. 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 for additional information on inventory.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS — Equipment and leasehold improvements are stated at cost. Depreciation and amortizationcalculated 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. See Note for additional information on equipment and leasehold improvements.
— In February 2016, the FASB issued ASU 2016-02 (Topic 842), Leases. This new standard revises existing lease guidance and requires all operating leases to be recorded on a company's balance sheet as right-of-use ("ROU") assets and lease liabilities. The new guidance also requires additional disclosures about leases. The Company early adopted the requirements of the new standard on July 1, 2018 using the modified retrospective transition method. Prior period Consolidated Financial Statements were restated to reflect modified retrospective adoption beginning with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.
The Company determines if a contract is a lease at the date of inception. The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly-owned by the former chairman, and has determined that the lease is an operating lease.
Operating leases are reported on the Company's Consolidated Balance Sheets as operating lease ROU assets and operating lease liabilities. Operating lease ROU assets and liabilities are valued at the present value of the future lease payment obligations.
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 Operations, which is where the annual premiums are recorded.
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 Operations. See Note 9 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 an 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, 2019 and 2018.
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 11. 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.
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 revenue and expenses during the reported period. Actual results could differ from those estimates.
RECLASSIFICATIONS — Certain amounts previously reported have been reclassified to conform to the current presentation.
2.
|
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
|
REVENUE RECOGNITION — In May 2014, the FASB issued ASU 2014-09 (Topic 606), Revenue from Contracts with Customers. The Company adopted the new standard effective July 1, 2018, using the full retrospective method. Adoption of the new revenue recognition standard required the Company to restate its previously reported results for the prior year comparative period and had a material impact on the Consolidated Balance Sheets but an overall immaterial impact on its consolidated statements of income and cash flows and related disclosures. The impact on the Company's Consolidated Balance Sheets was a result of the adjustment to defer revenue from prior years and a corresponding adjustment to retained earnings. See Note 3 for additional information on revenue recognition and the impact on previously reported results.
LEASES — In February 2016, the FASB issued ASU 2016-02 (Topic 842), Leases. The Company elected to early adopt the standard effective July 1, 2018, concurrent with the adoption of the new standard related to revenue recognition. The adoption of the new lease standard had a material impact on the Consolidated Balance Sheets but did not have an impact on the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows. The impact on the Company's Consolidated Balance Sheets was a result of recording the right-of-use asset and corresponding lease liability. Adoption of the new standard also required the Company to restate its previously reported results to include the recognition of right-of-use assets and lease liabilities for the prior year comparative period. See Note 15 for additional information on leases.
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 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 to 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 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 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
:
|
|
2019
|
|
|
|
2018*
|
|
United States
|
|
$
|
15,255,741
|
|
|
$
|
16,584,115
|
|
Export
|
|
|
6,586,356
|
|
|
|
6,938,516
|
|
Net Sales
|
|
$
|
21,842,097
|
|
|
$
|
23,522,631
|
|
*As adjusted for the retrospective adoption of ASC 606
Effective June 30, 2019, the Company changed its accounting principle for inventory and discontinued the use of the last-in, first-out ("LIFO") method for inventory valuation and adopted the first-in, first-out ("FIFO") method of . The FIFO value is preferred due to it being more reflective of the actual cost. This change in accounting principle did not change the inventory valuation as of June 30, 2018 or June 30, 2019 as the LIFO reserve was $0 as of both dates. The results of operations for the years ended June 30, 2018 and June 30, 2019 were not impacted by discontinuing the use of LIFO since the LIFO reserve was reduced to $0 effective June 30, 2017.
As of June 30, 2019 and 2018, the Company’s inventory was recorded using the lower of FIFO cost or . The components of inventories at June 30, 2019 and 2018 were as follows:
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
1,848,340
|
|
|
$
|
2,717,862
|
|
Finished goods
|
|
|
6,604,408
|
|
|
|
6,057,703
|
|
|
|
|
8,452,748
|
|
|
|
8,775,565
|
|
Reserve for obsolete inventory
|
|
|
(1,601,300
|
)
|
|
|
(2,636,886
|
)
|
Total inventories
|
|
$
|
6,851,448
|
|
|
$
|
6,138,679
|
|
5.
|
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
|
The major categories of equipment and leasehold improvements at June 30, 2019 and 2018 are summarized as follows:
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
useful lives (in years)
|
|
|
2019
|
|
|
2018
|
|
Machinery and equipment
|
|
5 - 10
|
|
|
$
|
593,595
|
|
|
$
|
593,595
|
|
Furniture and office equipment
|
|
5 - 10
|
|
|
|
357,351
|
|
|
|
357,351
|
|
Tooling
|
|
5
|
|
|
|
4,261,077
|
|
|
|
4,308,967
|
|
Computer equipment
|
|
3 - 5
|
|
|
|
758,819
|
|
|
|
758,820
|
|
Leasehold improvements
|
|
3 - 10
|
|
|
|
2,517,226
|
|
|
|
2,457,006
|
|
Assets in progress
|
|
N/A
|
|
|
|
118,737
|
|
|
|
19,500
|
|
|
|
|
|
|
|
8,606,805
|
|
|
|
8,495,239
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
7,716,695
|
|
|
|
7,363,134
|
|
Equipment and leasehold improvements, net
|
|
|
|
|
$
|
890,110
|
|
|
$
|
1,132,105
|
|
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 (benefit) provision in 2019 and 2018 consisted of the following:
Year Ended June 30,
|
|
2019
|
|
|
2018*
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(13,277
|
)
|
|
$
|
414
|
|
State
|
|
|
25
|
|
|
|
25
|
|
Deferred
|
|
|
(13,251
|
)
|
|
|
3,041,405
|
|
Total income tax (benefit) provision
|
|
$
|
(26,503
|
)
|
|
$
|
3,041,844
|
|
*As adjusted for the retrospective adoption of ASC 606
On December 22, 2017, the Tax Cut and Jobs Act (TCJA) was enacted. The TCJA makes broad and complex changes to the U.S. tax code including, among other things, reducing the U.S. Federal Corporate tax rate from 35% to 21% effective January 1, 2018. In the second quarter of the fiscal year ended June 30, 2018, the Company recorded $713,826 of non-cash tax expense for the write-down of deferred income taxes due to the change in federal statutory tax rate.
The 2019 and 2018 tax results in an effective rate different than the federal statutory rate because of the following:
Year Ended June 30,
|
|
2019
|
|
|
2018*
|
|
Federal income tax liability (benefit) at statutory rate
|
|
$
|
85,599
|
|
|
$
|
(101,578
|
)
|
State income tax liability (benefit), net of federal income tax effect
|
|
|
20
|
|
|
|
(9,518
|
)
|
(Decrease) increase in valuation allowance
|
|
|
(328,541
|
)
|
|
|
2,266,219
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
91,179
|
|
Adjustment to deferred tax assets
|
|
|
189,186
|
|
|
|
-
|
|
Remeasurement of deferred income taxes
|
|
|
-
|
|
|
|
713,826
|
|
Other
|
|
|
|
|
|
|
81,716
|
|
Total income tax (benefit) provision
|
|
$
|
(26,503
|
)
|
|
$
|
3,041,844
|
|
*As adjusted for the retrospective adoption of ASC 606
Temporary differences which give rise to deferred income tax assets and liabilities at June 30, 2019 and June 30, 2018 include:
|
|
2019
|
|
|
2018*
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
642,424
|
|
|
$
|
635,936
|
|
Stock-based compensation
|
|
|
228,981
|
|
|
|
420,204
|
|
Accrued expenses and reserves
|
|
|
705,828
|
|
|
|
997,924
|
|
Federal and state net operating loss carryforwards
|
|
|
|
|
|
|
630,344
|
|
Equipment and leasehold improvements
|
|
|
122,714
|
|
|
|
26,568
|
|
Valuation allowance
|
|
|
(2,382,087
|
)
|
|
|
(2,710,628
|
)
|
Total deferred income tax assets
|
|
|
15,481
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(2,205
|
)
|
|
|
(348
|
)
|
Net deferred income tax assets
|
|
$
|
13,276
|
|
|
$
|
-
|
|
*As adjusted for the retrospective adoption of ASC 606 and ASC 842
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 value of such expected benefits. The Company has federal net operating loss carryforwards totaling $317,531 which expire in fiscal year 2037 and $312,272 which can be carried forward indefinitely. The Company has state net operating loss carryforwards totaling approximately $6,500,000 which expire in fiscal years 2026 through 2039.
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, 2019.
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, 2019 and 2018. The Company records interest related to unrecognized tax benefits in interest expense.
The Company does not believe it has any unrecognized tax benefits as of June 30, 2019 and 2018. Any changes to the Company's unrecognized tax benefits during the fiscal years ended June 30, 2019 and 2018 would 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 . For states in which the Company files state income tax returns, the statute of limitations is generally open for tax years ended June 30, 2014 and forward.
The following are the changes in the valuation allowance, which are net of the impact for the remeasurement due to the TCJA:
|
|
Balance,
|
|
|
Decrease (Increase)
|
|
|
|
|
|
|
|
beginning
|
|
|
in valuation
|
|
|
Balance,
|
|
Year Ended June 30,
|
|
of year
|
|
|
allowance
|
|
|
end of year
|
|
2019
|
|
$
|
(2,710,628
|
)
|
|
$
|
328,541
|
|
|
$
|
(2,382,087
|
)
|
2018
|
|
$
|
(444,409
|
)
|
|
$
|
(2,266,219
|
)
|
|
$
|
(2,710,628
|
)
|
On May 12, 2010, the Company entered into a secured credit facility ("JPMorgan Credit Agreement") with JPMorgan Chase Bank, N.A. ("JPMorgan"). The JPMorgan Credit Agreement provided for an $8,000,000 revolving secured credit facility with interest rates either ranging from 0.0% to 0.75% over JPMorgan'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 June 29, 2017, the JPMorgan Credit Agreement was amended to reduce the facility to $4,000,000 and to eliminate the financial covenants. On May 9, 2018, the JPMorgan Credit Agreement was amended to extend the expiration to July 31, 2019. In addition to the revolving loans, the JPMorgan Credit Agreement also provides that the Company may, from time to time, request JPMorgan 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 JPMorgan Credit Agreement contained certain affirmative and negative 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 Company andJPMorgan also entered into the Pledge and Security Agreement dated May 12, 2010, under which the Company granted JPMorgan a security interest in substantially all of the Company’s assets in connection with the Company’s obligations under the JPMorgan Credit Agreement. As of June 30, 2018, there were no outstanding borrowings on the facility.
On May 14, 2019, the Company entered into a secured credit facility ") with Town Bank (“Lender”) for a two-year term expiring on May 14, 2021. The Credit Agreement provides for an $5,000,000 revolving secured credit facility with interest rates of 1.50% over LIBOR. The Credit Agreement also provides for letters of credit for the benefit of the Company of up to a sublimit of . There are no unused line fees in the credit facility. The Company and the Lender also entered into a General Business Security Agreement dated May 14, 2019 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 Credit Agreement contains certain affirmative and negative covenants customary for financings of this type. The negative covenants include restrictions on other indebtedness, liens, , among other restrictions. The Company is currently in compliance with all covenants related to the Credit Agreement. As of June 30, 2019 there were no outstanding borrowings on the facility.
The Company incurs interest expense primarily related to its secured credit facility. Interest expense was $5,218 for the year ended June 30, 2018. There was no interest expense for the year ended June 30, 2019.
Accrued liabilities as of June 30, 2019 and 2018 were as follows:
|
|
2019
|
|
|
2018*
|
|
Cooperative advertising and promotion allowances
|
|
$
|
188,985
|
|
|
$
|
292,873
|
|
Customer credit balances
|
|
|
65,937
|
|
|
|
53,365
|
|
Current deferred compensation
|
|
|
150,000
|
|
|
|
150,000
|
|
Employee benefits
|
|
|
60,178
|
|
|
|
60,739
|
|
Legal and professional fees
|
|
|
65,914
|
|
|
|
81,000
|
|
Bonus and profit-sharing
|
|
|
18,694
|
|
|
|
17,975
|
|
Sales commissions and bonuses
|
|
|
51,026
|
|
|
|
74,078
|
|
Other
|
|
|
49,779
|
|
|
|
58,931
|
|
Total accrued liabilities
|
|
$
|
650,513
|
|
|
$
|
788,961
|
|
*As adjusted for retrospective adoption of ASC 606
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 Operations. 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% as of June 30, 2019 and 2018. The net present value was calculated for the current officer using a discount factor of 4.80% at June 30, 2019 and 2018.
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 were made under this arrangement for the years ended June 30, 2019 and 2018. The Company has a deferred compensation liability of $540,379 and $672,884 recorded as of June 30, 2019 and 2018, respectively. Deferred compensation expense of $17,495 and $102,293 was recognized under this arrangement in 2019 and 2018, respectively.
The Board of Directors has approved a supplemental retirement plan for 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 $2,029,583 and $1,871,125 recorded as of June 30, 2019 and 2018, respectively. Deferred compensation expense of $158,458 and $147,298 was recognized under this arrangement in 2019 and 2018, respectively.
10.
|
INCOME (LOSS) PER COMMON AND COMMON STOCK EQUIVALENT SHARE
|
Basic income (loss) per share is computed based on the weighted-average number of common shares outstanding. The weighted-average number of common shares outstanding was 7,401,030 for the year ended June 30, 2019 and 7,382,706 for the year ended June 30, 2018. Diluted income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding assuming dilution. The difference between basic and diluted income(loss) per share is the result of the dilutive effect of outstanding stock options. For the years ended June 30, 2019 and 2018 there were2,523,513 and2,405,000 shares of common stock underlying options and warrants, respectively, excluded due to these instruments being anti-dilutive.
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, 2019, there were 899,308 options available for future grants. Options vest over a three to five year period from the date of grant, . The Company's policy is to issue new shares when stock options are exercised.
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, 2019, there was $1,334,370 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 2.83 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 $387,556 and$331,560 in 2019 and 2018, respectively. These expenses were included in selling, general and administrative expenses.
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, 2019 and 2018 were $1.57 and $0.85, 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 2019 and 2018, the Company used the following weighted-average assumptions:
|
|
2019
|
|
|
2018
|
|
Expected stock price volatility
|
|
|
66
|
%
|
|
|
54
|
%
|
Risk free interest rate
|
|
|
2.86
|
%
|
|
|
1.91
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected forfeitures
|
|
|
29.68
|
%
|
|
|
24.40
|
%
|
Expected life of options (years)
|
|
|
5.8
|
|
|
|
5.6
|
|
The following table identifies options granted, exercised, canceled, or available for exercise pursuant to the 1990 Plan and the 2012 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Value of
|
|
|
|
|
|
|
|
Stock
|
|
|
Average
|
|
|
Remaining
|
|
|
In-The-
|
|
|
|
Number of
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Money
|
|
|
|
Shares
|
|
|
Price Range
|
|
|
Price
|
|
|
Life - Years
|
|
|
Options
|
|
Shares under option at June 30, 2017
|
|
|
2,180,000
|
|
|
$2.05 - $7.76
|
|
|
$
|
3.93
|
|
|
|
3.47
|
|
|
$
|
—
|
|
Granted
|
|
|
510,000
|
|
|
$1.77 - $1.95
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(285,000)
|
|
|
$5.47 - $7.76
|
|
|
$
|
5.55
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Shares under option at June 30, 2018
|
|
|
2,405,000
|
|
|
$1.77 - $6.28
|
|
|
$
|
3.31
|
|
|
|
3.61
|
|
|
$
|
—
|
|
Granted
|
|
|
585,000
|
|
|
$2.63 - $2.92
|
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(22,125)
|
|
|
$1.77 - $2.24
|
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(302,000)
|
|
|
$1.77 - $5.83
|
|
|
$
|
5.62
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(73,000)
|
|
|
$1.77 - $2.65
|
|
|
$
|
2.22
|
|
|
|
|
|
|
|
|
|
Shares under option at June 30, 2019
|
|
|
2,592,875
|
|
|
$1.77 - $6.28
|
|
|
$
|
2.96
|
|
|
|
4.23
|
|
|
$
|
48,280
|
|
Exercisable as of June 30, 2018
|
|
|
1,215,082
|
|
|
$2.05 - $6.28
|
|
|
$
|
4.27
|
|
|
|
2.31
|
|
|
$
|
10,750
|
|
Exercisable as of June 30, 2019
|
|
|
1,320,291
|
|
|
$1.77 - $6.28
|
|
|
$
|
3.45
|
|
|
|
2.20
|
|
|
$
|
9,788
|
|
The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between the market value of the Company's stock on June 30, 2019 and the exercise price, multiplied by the number of in-the-money outstanding and exercisable stock options.
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, 2019 and 2018 is as follows:
|
|
2019
|
|
|
2018
|
|
Total intrinsic value of stock options exercised
|
|
$
|
34,797
|
|
|
$
|
—
|
|
Cash received from stock option exercises
|
|
$
|
46,677
|
|
|
$
|
—
|
|
Total fair value of stock options vested
|
|
$
|
374,639
|
|
|
$
|
399,595
|
|
Total recognized tax benefit
|
|
$
|
9,198
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested as of June 30, 2017
|
|
|
1,074,834
|
|
|
|
0.96
|
|
Granted
|
|
|
510,000
|
|
|
|
0.85
|
|
Vested
|
|
|
(394,916
|
)
|
|
|
1.01
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested as of June 30, 2018
|
|
|
1,189,918
|
|
|
|
0.90
|
|
Granted
|
|
|
585,000
|
|
|
|
1.57
|
|
Vested
|
|
|
(429,334
|
)
|
|
|
0.87
|
|
Forfeited
|
|
|
(73,000
|
)
|
|
|
1.33
|
|
Non-vested as of June 30, 2019
|
|
|
1,272,584
|
|
|
|
1.19
|
|
12.
|
STOCK REPURCHASE PROGRAM
|
$2,000,00 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, 2019, 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 2019 or 2018.
2019, 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.
13.
|
ADDITIONAL CASH FLOW INFORMATION
|
The net changes in cash as a result of changes in operating assets and liabilities consist of the following:
|
|
2019
|
|
|
2018*
|
|
Accounts receivable
|
|
$
|
1,031,180
|
|
|
$
|
(773,330
|
)
|
Inventories
|
|
|
(712,769
|
)
|
|
|
2,206,664
|
|
Prepaid expenses and other current assets
|
|
|
72,887
|
|
|
|
(381
|
)
|
Income taxes receivable
|
|
|
(13,285
|
)
|
|
|
439
|
|
Accounts payable
|
|
|
|
|
|
|
(813,619
|
)
|
Accrued liabilities
|
|
|
(138,448
|
)
|
|
|
30,834
|
|
Net change
|
|
$
|
|
|
|
$
|
650,607
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
1,620
|
|
|
$
|
3,182
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
5,218
|
|
*As adjusted for retrospective adoption of ASC 606 and ASC 842
Deferred revenue relates primarily to consumer and customer warranties. These constitute future performance obligations and the Company defers revenue related to these future performance obligations. The Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $497,351 and $480,375 in the twelve months ended June 30, 2019 and 2018, respectively, for performance obligations related to consumer and customer warranties
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 and included an option to renew at the same rate for an additional five years ending June 30, 2028 . The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership.
The Company used its incremental borrowing rate as of July 1, 2017, the retrospective date of adoption of ASU 2016-02 (Topic 842) Leases, to calculate the net present value of the operating lease ROU asset and liability. The five year renewal option was included in the calculation of the ROU asset and liability as the Company believes it is more likely than not to exercise its right to renew. The non-lease components of the agreement related to common area maintenance charges are accounted for separately.
Adoption of the standard related to leases impacted the Company's previously reported results by adding the following line items to the Company's Consolidated Balance Sheets:
Balance Sheet
|
|
As
|
|
June 30, 2018
|
|
Adjusted
|
|
Assets:
|
|
|
|
|
Operating lease right-of-use asset
|
|
$
|
3,102,263
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Operating lease liability
|
|
|
254,418
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
Operating lease liability
|
|
$
|
2,847,845
|
|
Supplemental information related to lease expense and valuation of the ROU asset and liability was as follows:
|
|
Year Ended
|
|
|
|
2019
|
|
|
2018
|
|
Operating lease cost
|
|
$
|
380,000
|
|
|
$
|
380,000
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
(380,000
|
)
|
|
$
|
(380,000
|
)
|
Weighted-average remaining lease term (in years)
|
|
|
9
|
|
|
|
10
|
|
Weighted-average discount rate
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
The maturity schedule of future minimum lease payments and reconciliation to the operating lease reported on the Consolidated Balance Sheet is as follows:
Year Ending June 30,
|
|
|
|
|
2020
|
|
$
|
380,000
|
|
2021
|
|
|
380,000
|
|
2022
|
|
|
380,000
|
|
2023
|
|
|
380,000
|
|
2024
|
|
|
380,000
|
|
Thereafter
|
|
|
1,520,000
|
|
Total lease payments
|
|
|
3,420,000
|
|
Present value adjustment
|
|
|
(572,155
|
)
|
Total lease liabilities
|
|
$
|
2,847,845
|
|
16.
|
EMPLOYEE BENEFIT PLANS
|
2019 or 2018.
2019 and 2018, the matching contribution was 50% and 75% of employee contributions to the plan, respectively. Vesting of Company contributions occurs immediately. Company contributions were $160,171 and $276,217 during 2019 and 2018, respectively.
The Company’s sales to its largest single customer, Wal-Mart, were approximately 18% and 21% of net sales in fiscal year 2019 and 2018, respectively. The Company is dependent upon its ability to retain a base of retailers and distributors to sell the Company’s line of products. Loss of retailers and distributors means loss of product placement. The Company has broad distribution across many channels including specialty stores, mass merchants, and electronics stores. Management believes that any loss of revenues would be partially offset by a corresponding decrease, on a percentage basis, in expenses, thereby partially reducing the impact on the Company’s income from operations. The five largest customers of the Company (including Wal-Mart in both years) accounted for approximately 45% and 47% of net sales in fiscal years 2019 and 2018, respectively. Accounts receivable from Wal-Mart as of June 30, 2019 and June 30, 2018, represented approximately 33% and 34% of trade account receivables, respectively. The majority of international customers, outside of Canada, purchase products on a cash against documents or cash in advance basis. Approximately 10% and 26% of the Company's trade accounts receivable at June 30, 2019 and 2018, were foreign receivables denominated in U.S. dollars.
The Company uses contract manufacturing facilities in the People’s Republic of China. The majority of the contract manufacturing is done by four vendors with one vendor representing approximately of the manufacturing costs. The Company has a long-term relationship with this vendor. However, increased costs from the vendor or an interruption of supply from this vendor could have a material adverse effect on the Company's profit margins and profitability.
As of June 30, 2019, the Company is involved in the following rdescribed below:
|
•
|
On or around July 13, 2018, the Company was served with a lawsuit by a former celebrity endorser of certain products alleging that the Company used her name and image to market and sell the products after the termination of their agreement without her consent. On August 10, 2018, the Company filed a Motion to Dismiss the complaint, which has subsequently been denied. This case remains pending.
|
|
•
|
The Company has launched a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has incurred costs and will continue to incur costs related to enforcing this program. These costs primarily relate to legal fees and other costs involved with the underlying efforts to enforce this portfolio. Depending on the response to and the underlying results of the enforcement program, the Company may enter into licensing arrangements or initiate lawsuits as part of the Company’s efforts to enforce this program.
|
The ultimate resolution of these matters 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.