Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 for the quarterly period ended September 30, 2019

 

OR

 

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 Commission File Number 0-3295

 

KOSS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

DELAWARE

 

39-1168275

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

4129 North Port Washington Avenue, Milwaukee, Wisconsin

 

53212

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (414) 964-5000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common

KOSS

NASDAQ

 

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 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 ☐

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☑

(Do not check if a smaller reporting company)

 

 

 

 

Emerging growth company ☐

 

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 ☑

 

At November 8, 2019, there were 7,404,831 shares outstanding of the registrant’s common stock. 

 

 

 

KOSS CORPORATION

FORM 10-Q

September 30, 2019

 

INDEX

 

 

 

 

Page

 

 

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and June 30, 2019

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2019 and 2018

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended September 30, 2019 and 2018

5

 

 

 

 

 

    Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three Months Ended September 30, 2019 and 2018 6  
       

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

10

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

12

 

 

 

 

 

 

Item 4.

Controls and Procedures

12

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

13

 

 

 

 

 

 

Item 1A.

Risk Factors

13

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

13

 

 

 

 

 

 

Item 6.

Exhibits

14

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

KOSS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)

         
   

September 30, 2019

   

June 30, 2019*

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 1,329,487     $ 2,228,282  

Accounts receivable, less allowance for doubtful accounts of $5,201 and $2,617, respectively

    3,132,158       3,655,143  

Inventories, net

    6,858,779       6,851,448  

Prepaid expenses and other current assets

    231,036       133,889  

Income taxes receivable

    47,921       45,660  

Total current assets

    11,599,381       12,914,422  
                 

Equipment and leasehold improvements, net

    959,635       890,110  
                 

Other assets:

               
Deferred income taxes     9,957       13,276  

Operating lease right-of-use assets

    2,782,537       2,847,846  

Cash surrender value of life insurance

    6,827,133       6,569,628  

Total other assets

    9,619,627       9,430,750  
                 

Total assets

  $ 22,178,643     $ 23,235,282  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 572,178     $ 1,436,373  

Accrued liabilities

    711,615       650,513  

Deferred revenue

    616,688       645,470  

Operating lease liability

    268,274       265,443  

Total current liabilities

    2,168,755       2,997,799  
                 

Long-term liabilities:

               

Deferred compensation

    2,419,478       2,419,962  

Deferred revenue

    166,607       163,018  

Operating lease liability

    2,514,263       2,582,402  

Total long-term liabilities

    5,100,348       5,165,382  
                 

Total liabilities

    7,269,103       8,163,181  
                 

Stockholders' equity:

               

Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 7,404,831

    37,024       37,024  

Paid in capital

    6,481,323       6,333,135  

Retained earnings

    8,391,193       8,701,942  

Total stockholders' equity

    14,909,540       15,072,101  
                 

Total liabilities and stockholders' equity

  $ 22,178,643     $ 23,235,282  

 

*As adjusted for change in accounting principle (Note 2)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

   

Three Months Ended

 
   

September 30

 
   

2019

   

2018*

 

Net sales

  $ 5,410,762     $ 5,784,839  

Cost of goods sold

    4,063,308       3,953,655  

Gross profit

    1,347,454       1,831,184  
                 

Selling, general and administrative expenses

    1,664,600       1,789,589  
                 

(Loss) income from operations

    (317,146 )     41,595  
                 

Interest income

    6,397       -  
                 

(Loss) income before income tax provision

    (310,749 )     41,595  
                 

Income tax provision

    -       25  
                 

Net (loss) income

  $ (310,749 )   $ 41,570  
                 

(Loss) income per common share:

               

Basic

  $ (0.04 )   $ 0.01  

Diluted

  $ (0.04 )   $ 0.01  
                 
Weighted-average number of shares:                
Basic     7,404,831       7,389,751  
Diluted     7,404,831       7,483,866  

 

*As adjusted for change in accounting principle (Note 2)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   

Three Months Ended

 
   

September 30

 
   

2019

   

2018*

 

Operating activities:

               

Net (loss) income

  $ (310,749 )   $ 41,570  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for doubtful accounts

    2,584       42,938  

Depreciation of equipment and leasehold improvements

    94,357       125,748  

Stock-based compensation expense

    148,188       122,642  

Deferred income taxes

    3,319       -  

Change in cash surrender value of life insurance

    (144,872 )     (24,449 )

Change in deferred compensation accrual

    37,016       43,988  

Deferred compensation paid

    (37,500 )     (37,500 )
Net changes in operating assets and liabilities:                
Accounts receivable     520,401       1,079,739  
Inventories     (7,331 )     (258,008 )
Prepaid expenses and other current assets     (97,147 )     (115,685 )
Income taxes receivable     (2,261 )     25  
Accounts payable     (864,195 )     (296,892 )
Accrued liabilities     61,102       96,777  

Deferred revenue

    (25,193 )     (113,104 )

Net cash (used in) provided by operating activities

    (622,281 )     707,789  
                 

Investing activities:

               

Purchase of equipment and leasehold improvements

    (163,881 )     (14,790 )

Life insurance premiums paid

    (112,633 )     (122,754 )

Net cash (used in) investing activities

    (276,514 )     (137,544 )
                 

Financing activities:

               

Proceeds from exercise of stock options

    -       46,677  

Net cash provided by financing activities

    -       46,677  
                 

Net (decrease) increase in cash and cash equivalents

    (898,795 )     616,922  

Cash and cash equivalents at beginning of period

    2,228,282       1,081,533  

Cash and cash equivalents at end of period

  $ 1,329,487     $ 1,698,455  

 

*As adjusted for change in accounting principle (Note 2)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

   

Three Months Ended September 30, 2019

 
   

Common Stock

   

Paid in

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance, June 30, 2019, as previously reported

    7,404,831     $ 37,024     $ 6,186,393     $ 8,848,684     $ 15,072,101  
Retrospective change in accounting principle (see Note 2)     -       -       146,742       (146,742 )     -  
Adjusted Balance, June 30, 2019     7,404,831     $ 37,024     $ 6,333,135     $ 8,701,942     $ 15,072,101  

Net (loss)

    -       -       -       (310,749 )     (310,749 )

Stock-based compensation expense

    -       -       148,188       -       148,188  

Balance, September 30, 2019

    7,404,831     $ 37,024     $ 6,481,323     $ 8,391,193     $ 14,909,540  

 

 

   

Three Months Ended September 30, 2018

 
   

Common Stock

   

Paid in

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance, June 30, 2018, as previously reported

    7,382,706     $ 36,914     $ 5,752,270     $ 8,414,570     $ 14,203,754  
Retrospective change in accounting principle (see Note 2)     -       -       18,617       (18,617 )     -  
Adjusted Balance, June 30, 2018     7,382,706     $ 36,914     $ 5,770,887     $ 8,395,953     $ 14,203,754  

Net income, as restated

    -       -       -       41,570       41,570  

Stock-based compensation expense, as restated

    -       -       122,642       -       122,642  
Exercise of common stock options     22,125       110       46,567       -       46,677  

Balance, September 30, 2018

    7,404,831     $ 37,024     $ 5,940,096     $ 8,437,523     $ 14,414,643  

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

KOSS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A)  BASIS OF PRESENTATION

 

The condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of operations for the three months ended September 30, 2019 and 2018, the condensed consolidated statements of cash flows for the three months ended September 30, 2019 and 2018 and the condensed consolidated statements of stockholders' equity for the three months ended September 30, 2019 and 2018, have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and have not been audited.    In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made.  The operating results for any interim period are not necessarily indicative of the operating results that may be experienced for the full fiscal year.

 

Certain information and footnote disclosure normally included in consolidated financial statements prepared in accordance with U.S. GAAP  have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

 

The preparation of financial statements in conformity with U.S. GAAP requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, income tax reserves, non-cash stock-based compensation and post-retirement obligations. Actual results could differ from the company's estimates.

 

B)   INCOME TAXES

 

A tax provision of $0 and $25 was recorded during the three months ended September 30, 2019 and 2018, respectively. Utilization of net operating tax carryforwards and use of bonus depreciation in conjunction with a full valuation allowance against deferred tax assets has reduced the income tax expense to zero.

 

 

 2.    CHANGE IN ACCOUNTING PRINCIPLE

 

During the first quarter of fiscal 2020, the Company changed its method of recording stock-based compensation expense.  Under the new accounting principle, stock-based compensation expense is recorded on a straight-line basis over the vesting period and forfeitures are recognized when they occur.  Under the previous method, the Company estimated future forfeitures and the expected number of awards that would vest and subsequently adjusted for forfeitures.  The Company believes this method of recording stock-based compensation expense on a straight-line basis over the vesting period is preferable since it is more reflective of the stock options that will actually vest.

 

The cumulative effect of the changes in the June 30, 2019 Consolidated Balance Sheet for the change in principle related to stock-based compensation expense using the full retrospective method was as follows:

 

           

Stock-Based

         

Balance Sheet

 

As Previously

   

Compensation

   

As

 

June 30, 2019

 

Reported

   

Adjustment

   

Adjusted

 

Equity:

                       

Paid in capital

  $ 6,186,393     $ 146,742     $ 6,333,135  

Retained earnings

  $ 8,848,684     $ (146,742 )   $ 8,701,942  


 

 

The impact of the change in principle on the Consolidated Statement of Operations for the three months ended September 30, 2018 was as follows:

 

           

Stock-Based

         

Statement of Operations

 

As Previously

   

Compensation

   

As

 

Three Months Ended September 30, 2018

 

Reported

   

Adjustment

   

Adjusted

 

Selling, general and administrative expenses

  $ 1,763,748     $ 25,841     $ 1,789,589  

Income from operations

    67,436       (25,841 )     41,595  

Net income

  $ 67,411     $ (25,841 )   $ 41,570  
                         

Income per common share

                       

Basic

  $ 0.01     $ -     $ 0.01  

Diluted

  $ 0.01     $ -     $ 0.01  

 

 

The impact of the change in principle on the Consolidated Statement of Cash Flows for the three months ended September 30, 2018 was as follows:

 

           

Stock-Based

         

Statement of Cash Flows

 

As Previously

   

Compensation

   

As

 

Three Months Ended September 30, 2018

 

Reported

   

Adjustment

   

Adjusted

 

Operating activities:

                       

Net income

  $ 67,411     $ (25,841 )   $ 41,570  

Stock-based compensation expense

  $ 96,801     $ 25,841     $ 122,642  

 

 

 

 

3.    INVENTORIES

 

The components of inventories were as follows:

 

   

September 30, 2019

   

June 30, 2019

 

Raw materials

  $ 1,871,103     $ 1,848,340  

Finished goods

    6,582,439       6,604,408  
Inventories, gross     8,453,542       8,452,748  

Reserve for obsolete inventory

    (1,594,763 )     (1,601,300 )

Inventories, net

  $ 6,858,779     $ 6,851,448  

 

 

4.    CREDIT FACILITY

 

On May 14, 2019, the Company entered into a secured credit facility ("Credit Agreement") 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 $1,000,000. 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, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions. The Company is currently in compliance with all covenants related to the Credit Agreement. As of September 30, 2019, and June 30, 2019, there were no outstanding borrowings on the facility. 

 

 

5.    REVENUE RECOGNITION

 

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

 

   

Three Months Ended

 
   

September 30

 
   

2019

      2018  

United States

  $ 4,504,275     $ 3,770,884  

Export

    906,487       2,013,955  

Net Sales

  $ 5,410,762     $ 5,784,839  

 

 

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 $158,053 and $174,023 in the three months ended September 30, 2019 and 2018, respectively, for performance obligations related to consumer and customer warranties.  The deferred revenue liability was $859,370 and $746,267 as of June 30, 2018 and September 30, 2018, respectively.

 

 

6.    (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.  Diluted income per common share is calculated assuming the exercise of stock options except where the result would be anti-dilutive.  The following table reconciles the numerator and denominator used to calculate basic and diluted income per share:

 

   

Three Months Ended September 30,

 
   

2019

   

2018*

 

Numerator

               

Net (loss) income

  $ (310,749 )   $ 41,570  
                 

Denominator

               

Weighted average shares, basic

    7,404,831       7,389,751  

Dilutive effect of stock compensation awards

    -       94,115  

Diluted shares

    7,404,831       7,483,866  
                 

Net (loss) income attributable to common shareholders per share:

               

Basic

  $ (0.04 )   $ 0.01  

Diluted

  $ (0.04 )   $ 0.01  

 

*As adjusted for change in accounting principle (Note 2)

 

 

7.    LEASES

 

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.

 

 

8.    LEGAL MATTERS

 

The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of business.  Although management currently believes that resolving these claims against us, individually or in the aggregate, will not have a material adverse impact on the Consolidated Financial Statements, these matters are subject to inherent uncertainties and management's view of these matters may change in the future.

 

 

 

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.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The Company developed stereo headphones in 1958 and has been a leader in the industry.  Koss markets a complete line of high-fidelity headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling headphones. The Company operates as one business segment.

 

Results of Operations Summary

 

 

Net sales for the quarter ended September 30, 2019, decreased $374,077 to $5,410,762, compared to the same quarter last year.   

 

Gross profit as a percent of sales decreased for the three months ended September 30, 2019 compared to the same quarter last year. The lower margin was primarily driven by change in the mix of business by product, customer and sales channel.

 

Selling, general and administrative expenses for the three months ended September 30, 2019, decreased compared to the same period in the prior year primarily due to a increase in cash surrender value income.

 

Tax expense for the three months ended September 30, 2019, was minimal due to an offsetting change in the valuation allowance for deferred tax assets.

 

Financial Results

 

The following table presents selected financial data for the three months ended September 30, 2019 and 2018:

 

   

Three Months Ended

 
   

September 30

 

Financial Performance Summary

 

2019

   

2018

 

Net sales

  $ 5,410,762     $ 5,784,839  

Net sales (decrease) %

    (6.5 )%     (4.9 )%

Gross profit

  $ 1,347,454     $ 1,831,184  

Gross profit as % of net sales

    24.9 %     31.7 %

Selling, general and administrative expenses

  $ 1,664,600     $ 1,789,589  

Selling, general and administrative expenses as % of net sales

    30.8 %     30.9 %

Interest income

  $ 6,397     $ -  

(Loss) income before income tax provision

  $ (310,749 )   $ 41,595  

(Loss) income before income tax as % of net sales

    (5.7 )%     0.7 %

Income tax provision

  $ -     $ 25  

Income tax provision as % of income before income tax

    0 %     0 %

 

2019 Results Compared with 2018

 

For the three months ended September 30, 2019, sales declined 6.5% due to a decrease in the export markets.  Sales in the domestic markets increased over the same period last year.

 

Export net sales decreased from approximately $2,014,000 to approximately $907,000 for the three months ended September 30, 2019 compared to last year.  This quarter last year included approximately $653,000 of net sales related to a contract that ended in December 2018.   Sales to a distributor based in Scandinavia declined approximately $376,000.  The decline in Scandinavia was driven by a loss of product placement and the recent strength of the US dollar.

 

Domestic net sales increased to approximately $4,504,000 in the three months ended September 30, 2019, from approximately $3,771,000 in the three months ended September 30, 2018. Increased sales to mass retail to support back-to-school promotions added approximately $410,000 and increased sales to a direct to consumer customer added another approximately $187,000.  The direct to consumer increase in sales was due to a custom product that began shipping late in the prior fiscal year.

 

Gross profit decreased to 24.9% for the three months ended September 30, 2019, compared to 31.7% for the three months ended September 30, 2018. The lower gross profit in the current year was largely due to change in mix by products and customers.  The increased net sales for the back-to-school promotion products are at lower margin than the decreased sales to the export markets.

 

Selling, general and administrative expenses for the three months ended September 30, 2019, decreased compared to the prior year. An increase of approximately $120,000 cash surrender value income was the most significant factor.  Bad debt expense declined by approximately $40,000 this year compared to last year when the bad debt for a domestic mass retail customer was recorded as a result of a Chapter 11 filing.   Legal fees increased by approximately $42,000 primarily due to continued efforts to protect and support our intellectual property portfolio.

 

Income tax expense for the three months ended September 30, 2019, was comprised of the U.S. federal statutory rate of 21% and the effect of state income taxes fully offset by an adjustment to the valuation allowance for deferred tax assets.

 

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. If successful, the Company may receive royalties, offers to purchase its intellectual property, or other proceeds in amounts that could have a material effect on its financial statements.

 

 

 

 

Liquidity and Capital Resources

 

Cash Flows

 

The following table summarizes cash flows from operating, investing and financing activities for the three months ended September 30, 2019 and 2018:

 

Total cash provided by (used in):

 

2019

   

2018

 

Operating activities

  $ (622,281 )   $ 707,789  

Investing activities

    (276,514 )     (137,544 )

Financing activities

    -       46,677  

Net (decrease) increase in cash and cash equivalents

  $ (898,795 )   $ 616,922  

 

Operating Activities

 

The decrease in accounts payable and the loss from operations were the driving factors for the decrease in cash provided by operating activities during the three months ended September 30, 2019.  There was significant inventory inbound to the U.S. from China as of June 30, 2019 that was paid for during the current quarter.  The impact of these factors was partially offset by a decrease in accounts receivable. 

  

Investing Activities

 

Cash used in investing activities was higher for the three months ended September 30, 2019, as the Company had increased expenditures for  leasehold improvements and for tooling related to new product introductions. During the fiscal year ending June 30, 2020, the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures of approximately $750,000  to $900,000.  The Company expects to generate sufficient cash flow through operations or through the use of its available cash and its credit facility to fund these expenditures.

 

Financing Activities

 

As of September 30, 2019 and 2018, the Company had no outstanding borrowings on its bank line of credit facility.

 

There were no purchases of common stock in 2019 or 2018 under the stock repurchase program.  Cash provided in 2018 was from stock options exercised which resulted in the issuance of  22,125 shares of common stock. No stock options were exercised in 2019.

 

Liquidity

 

The Company's capital expenditures are primarily for leasehold improvements and tooling. In addition, it has interest payments on its borrowings when it uses its line of credit facility. The Company believes that cash generated from operations, together with cash reserves and borrowings available under its credit facility, provide it with adequate liquidity to meet operating requirements, debt service requirements and planned capital expenditures for the next twelve months and thereafter for the foreseeable future. The Company regularly evaluates new product offerings, inventory levels and capital expenditures to ensure that it is effectively allocating resources in line with current market conditions.

 

Credit Facility

 

On May 14, 2019, the Company entered into a secured credit facility ("Credit Agreement") 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 $1,000,000. 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, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions. The Company is currently in compliance with all covenants related to the Credit Agreement. As of September 30, 2019, and June 30, 2019, there were no outstanding borrowings on the facility. 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable. 

 

 

Item 4.

Controls and Procedures

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that: (1) information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (2)  such information is accumulated and communicated to management, including the chief executive officer and principal financial officer, to allow timely decisions regarding required disclosures.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

 

The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2019.  The Company’s management has concluded that the Company’s disclosure controls and procedures as of September 30, 2019 were effective.

 

 

Changes in Internal Control Over Financial Reporting

 

There have been no significant changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II

OTHER INFORMATION

 

Item 1.

 Legal Proceedings

 

As of September 30, 2019, the Company is currently involved in legal matters that are described in Note 7 to the condensed consolidated financial statements, which description is incorporated herein by reference.

 

Item 1A.

Risk Factors

 

Not applicable.

 

Item 2.

 Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table presents information with respect to purchases of common stock of the Company made during the three months ended September 30, 2019, by the Company.

 

COMPANY REPURCHASES OF EQUITY SECURITIES

 

Period (2019)

 

Total # of Shares Purchased

   

Average Price Paid per Share

   

Total Number of Shares Purchased as Part of Publicly Announced Plan (1)

   

Approximate Dollar Value of Shares Available under Repurchase Plan

 

July 1 - September 30

    -     $ -       -     $ 2,139,753  

 

(1)

In April of 1995, the Board of Directors approved a stock repurchase program authorizing the Company to purchase from time to time up to $2,000,000 of its common stock for its own account. Subsequently, the Board of Directors periodically has approved increases in the stock repurchase program. The most recent increase was for an additional $2,000,000 in October 2006, for a maximum of $45,500,000 of which $43,360,247 had been expended through September 30, 2019.

 

 

Item 6.

Exhibits

 

Exhibit No.

Exhibit Description

 

 

18.1 Preferability Letter
   

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer *

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer *

 

 

32.1

Section 1350 Certification of Chief Executive Officer **

 

 

32.2

Section 1350 Certification of Chief Financial Officer **

 

 

101

The following financial information from Koss Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three months ended September 30, 2019 and 2018 (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended September 30, 2019 and 2018 , (iv) Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the three months ended September 30, 2019 and 2018 and (v) the Notes to Condensed Consolidated Financial Statements (Unaudited). *

 

__________________________

   

*

Filed herewith

**

Furnished herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

KOSS CORPORATION

 

 

 

 

 

/s/ Michael J. Koss

November 12, 2019

Michael J. Koss

 

Chairman

 

Chief Executive Officer

 

 

 

 

 

/s/ David D. Smith

November 12, 2019

David D. Smith

 

Chief Financial Officer

 

Principal Accounting Officer

 

 

 

 

15

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