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 March 31, 2020 

 

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 May 4, 2020, there were 7,404,831 shares outstanding of the registrant’s common stock. 

 

 

 

KOSS CORPORATION

FORM 10-Q

March 31, 2020

 

INDEX

 

 

 

 

Page

 

 

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and June 30, 2019

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended March 31, 2020 and 2019

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended March 31, 2020 and 2019

5

 

 

 

 

 

    Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended March 31, 2020 and 2019 6  
       

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

 

 

Item 2.

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

11

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

14

 

 

 

 

 

 

Item 4.

Controls and Procedures

14

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

15

 

 

 

 

 

 

Item 1A.

Risk Factors

15

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

15

 

 

 

 

 

 

Item 6.

Exhibits

16

 

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

KOSS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)

         
   

March 31, 2020

   

June 30, 2019*

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 2,063,963     $ 2,228,282  

Accounts receivable, less allowance for doubtful accounts of $8,758 and $2,617, respectively

    3,553,376       3,655,143  

Inventories, net

    4,991,561       6,851,448  

Prepaid expenses and other current assets

    388,501       133,889  

Income taxes receivable

    10,234       45,660  

Total current assets

    11,007,635       12,914,422  
                 

Equipment and leasehold improvements, net

    1,022,860       890,110  
                 

Other assets:

               
Deferred income taxes     -       13,276  

Operating lease right-of-use assets

    2,649,823       2,847,846  

Cash surrender value of life insurance

    6,838,982       6,569,628  

Total other assets

    9,488,805       9,430,750  
                 

Total assets

  $ 21,519,300     $ 23,235,282  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 409,081     $ 1,436,373  

Accrued liabilities

    634,897       650,513  

Deferred revenue

    439,302       645,470  

Operating lease liability

    274,025       265,443  

Total current liabilities

    1,757,305       2,997,799  
                 

Long-term liabilities:

               

Deferred compensation

    2,344,478       2,419,962  

Deferred revenue

    165,226       163,018  

Operating lease liability

    2,375,797       2,582,402  

Total long-term liabilities

    4,885,501       5,165,382  
                 

Total liabilities

    6,642,806       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

    6,761,363       6,333,135  

Retained earnings

    8,078,107       8,701,942  

Total stockholders' equity

    14,876,494       15,072,101  
                 

Total liabilities and stockholders' equity

  $ 21,519,300     $ 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

   

Nine Months Ended

 
   

March 31

   

March 31

 
   

2020

   

2019*

   

2020

   

2019*

 

Net sales

  $ 4,789,441     $ 4,860,247     $ 14,362,862     $ 16,056,313  

Cost of goods sold

    3,199,665       3,205,039       10,061,544       10,907,425  

Gross profit

    1,589,776       1,655,208       4,301,318       5,148,888  
                                 

Selling, general and administrative expenses

    1,687,676       1,540,348       4,938,983       4,889,284  
                                 

(Loss) income from operations

    (97,900 )     114,860       (637,665 )     259,604  
                                 

Interest income

    6,631       -       19,955       -  
                                 

(Loss) income before income tax provision

    (91,269 )     114,860       (617,710 )     259,604  
                                 
Income tax provision     6,104       (23,020 )     6,125       (22,995 )
                                 

Net (loss) income

  $ (97,373 )   $ 137,880     $ (623,835 )   $ 282,599  
                                 

(Loss) income per common share:

                               

Basic

  $ (0.01 )   $ 0.02     $ (0.08 )   $ 0.04  

Diluted

  $ (0.01 )   $ 0.02     $ (0.08 )   $ 0.04  
                                 

Weighted-average number of shares:

                               

Basic

    7,404,831       7,404,831       7,404,831       7,399,768  

Diluted

    7,404,831       7,405,425       7,404,831       7,408,110  

 

 

*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)

 

   

Nine Months Ended

 
   

March 31

 
   

2020

   

2019*

 

Operating activities:

               

Net (loss) income

  $ (623,835 )   $ 282,599  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

               

(Recovery of) provision for doubtful accounts

    (8,938 )     4,039  

Depreciation of equipment and leasehold improvements

    258,401       336,946  

Stock-based compensation expense

    428,228       383,425  

Deferred income taxes

    13,276       (13,277 )

Change in cash surrender value of life insurance

    (156,398 )     (34,801 )

Change in deferred compensation accrual

    37,016       131,965  

Deferred compensation paid

    (112,500 )     (112,500 )
Net changes in operating assets and liabilities:                
Accounts receivable     110,705       1,893,559  
Inventories     1,859,887       (590,987 )
Prepaid expenses and other current assets     (254,612 )     (68,539 )
Income taxes receivable     35,426       (9,776 )
Accounts payable     (1,027,292 )     (222,292 )
Accrued liabilities     (15,616 )     (47,835 )

Deferred revenue

    (203,960 )     (96,118 )

Net cash provided by operating activities

    339,788       1,836,408  
                 

Investing activities:

               

Purchase of equipment and leasehold improvements

    (391,151 )     (118,647 )

Life insurance premiums paid

    (112,956 )     (123,076 )

Net cash (used in) investing activities

    (504,107 )     (241,723 )
                 

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

    (164,319 )     1,641,362  

Cash and cash equivalents at beginning of period

    2,228,282       1,081,533  

Cash and cash equivalents at end of period

  $ 2,063,963     $ 2,722,895  

 

 

*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)

 

 

   

Nine Months Ended March 31, 2020

 
   

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)

    -       -       -       (623,835 )     (623,835 )

Stock-based compensation expense

    -       -       428,228       -       428,228  

Balance, March 31, 2020

    7,404,831     $ 37,024     $ 6,761,363     $ 8,078,107     $ 14,876,494  

 

 

   

Nine Months Ended March 31, 2019

 
   

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

    -       -       -       282,599       282,599  

Stock-based compensation expense, as restated

    -       -       383,425       -       383,425  
Exercise of common stock options     22,125       110       46,567       -       46,677  

Balance, March 31, 2019

    7,404,831     $ 37,024     $ 6,200,879     $ 8,678,552     $ 14,916,455  

 

   

Three Months Ended March 31, 2020

 
   

Common Stock

   

Paid in

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 
Balance, December 31, 2019     7,404,831     $ 37,024     $ 6,618,029     $ 8,175,480     $ 14,830,533  
Net (loss)     -       -       -       (97,373 )     (97,373 )
Stock-based compensation expense     -       -       143,334       -       143,334  

Balance, March 31, 2020

    7,404,831     $ 37,024     $ 6,761,363     $ 8,078,107     $ 14,876,494  

 

   

Three Months Ended March 31, 2019

 
   

Common Stock

   

Paid in

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 
Balance, December 31, 2018, as restated     7,404,831     $ 37,024     $ 6,068,623     $ 8,540,672     $ 14,646,319  
Net income, as restated                             137,880       137,880  
Stock-based compensation expense, as restated                     132,256               132,256  

Balance, March 31, 2019

    7,404,831     $ 37,024     $ 6,200,879     $ 8,678,552     $ 14,916,455  

 

 

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

 

 

KOSS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

 

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A)  BASIS OF PRESENTATION

 

The condensed consolidated balance sheet as of March 31, 2020, the condensed consolidated statements of operations for the three and nine months ended March 31, 2020, the condensed consolidated statements of cash flows for the nine months ended March 31, 2020 and the condensed consolidated statements of stockholders' equity for the three and nine months ended March 31, 2020 and 2019, 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 valuation allowance, non-cash stock-based compensation and deferred compensation. Actual results could differ from the Company's estimates.

 

B)   INCOME TAXES

 

A state tax provision of $6,104 and $6,125 was recorded during the three and nine months ended March 31, 2020, respectively.  There was no state tax provision for the three and nine months ended March 31, 2019. Utilization of net operating tax carryforwards and a full valuation allowance against deferred tax assets reduced the federal income tax expense to zero for the three and nine months ended March 31, 2020 and 2019.  For the three and nine months ended March 31, 2019, the Company recorded an income tax benefit of $23,020 and $22,995, respectively, due to refund of the AMT credits not recognized in prior years.  This refund was allowed under the Tax Cuts and Jobs Act of 2017.

 

C)   PATENT COSTS

 

The Company incurs on-going legal fees and filing costs related to the patent portfolio. These costs are expensed in the period they are incurred since no patent legal costs were probable to provide a future economic benefit.  

 

 

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 and nine months ended March 31, 2019 was as follows:

           

Stock-Based

         

Statement of Operations

 

As Previously

   

Compensation

   

As

 

Three Months Ended March 31, 2019

 

Reported

   

Adjustment

   

Adjusted

 

Selling, general and administrative expenses

  $ 1,505,922     $ 34,426     $ 1,540,348  

Income from operations

    149,286       (34,426 )     114,860  

Net income

  $ 172,306     $ (34,426 )   $ 137,880  
                         

Income per common share

                       

Basic

  $ 0.02     $ (0.00 )   $ 0.02  

Diluted

  $ 0.02     $ (0.00 )   $ 0.02  

 

           

Stock-Based

         

Statement of Operations

 

As Previously

   

Compensation

   

As

 

Nine Months Ended March 31, 2019

 

Reported

   

Adjustment

   

Adjusted

 

Selling, general and administrative expenses

  $ 4,798,045     $ 91,239     $ 4,889,284  

Income from operations

    350,843       (91,239 )     259,604  

Net income

  $ 373,838     $ (91,239 )   $ 282,599  
                         

Income per common share

                       

Basic

  $ 0.05     $ (0.01 )   $ 0.04  

Diluted

  $ 0.05     $ (0.01 )   $ 0.04  

 

 

The impact of the change in principle on the Consolidated Statement of Cash Flows for the nine months ended March 31, 2019 was as follows:

 

           

Stock-Based

         

Statement of Cash Flows

 

As Previously

   

Compensation

   

As

 

Nine Months Ended March 31, 2019

 

Reported

   

Adjustment

   

Adjusted

 

Operating activities:

                       

Net income

  $ 373,838     $ (91,239 )   $ 282,599  

Stock-based compensation expense

  $ 292,186     $ 91,239     $ 383,425  

 

 

As of March 31, 2020, the unrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of 3.03 years, was $1,366,897.  The unrecognized stock-based compensation expense was $1,093,712 as of June 30, 2019, with an expected recognition weighted-average period of 3.01 years.

 

 

3.    INVENTORIES

 

The components of inventories were as follows:

 

   

March 31, 2020

   

June 30, 2019

 

Raw materials

  $ 1,915,307     $ 1,848,340  

Finished goods

    4,622,349       6,604,408  
Inventories, gross     6,537,656       8,452,748  

Reserve for obsolete inventory

    (1,546,095 )     (1,601,300 )

Inventories, net

  $ 4,991,561     $ 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 a $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 March 31, 2020, 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

   

Nine Months Ended

 
   

March 31

   

March 31

 
   

2020

   

2019

   

2020

   

2019

 

United States

  $ 4,200,797     $ 3,611,654     $ 11,785,603     $ 10,653,071  

Export

    588,644       1,248,593       2,577,259       5,403,242  

Net Sales

  $ 4,789,441     $ 4,860,247     $ 14,362,862     $ 16,056,313  

 

 

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 $367,198 and $424,574 in the nine months ended March 31, 2020 and 2019, respectively, for performance obligations related to consumer and customer warranties.  The deferred revenue liability was $859,370 and $763,252 as of June 30, 2018 and March 31, 2019, respectively. The Company estimates that the deferred revenue performance obligations are satisfied within one to three years and therefore uses that same time frame for recognition of the deferred revenue.

 

 

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 March 31,

   

Nine Months Ended March 31,

 
   

2020

   

2019*

   

2020

   

2019*

 

Numerator

                               

Net (loss) income

  $ (97,373 )   $ 137,880     $ (623,835 )   $ 282,599  
                                 

Denominator

                               

Weighted average shares, basic

    7,404,831       7,404,831       7,404,831       7,399,768  

Dilutive effect of stock compensation awards

    -       594       -       8,342  

Diluted shares

    7,404,831       7,405,425       7,404,831       7,408,110  
                                 

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

                               

Basic

  $ (0.01 )   $ 0.02     $ (0.08 )   $ 0.04  

Diluted

  $ (0.01 )   $ 0.02     $ (0.08 )   $ 0.04  

 

*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.      SUBSEQUENT EVENTS

 

On April 13, 2020, the Company entered into an unsecured loan ("SBA Loan") under the Small Business Administration ("SBA") Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") through Town Bank (“Lender”).  The SBA Loan funds that were disbursed on April 14, 2020, have a two-year term expiring on April 14, 2022. The SBA Loan has a principal amount of $506,700 with an interest rate of 1.0%. The Company may apply for forgiveness of the amount due under this SBA Loan in an amount equal to the sum of the following costs incurred by the Company during the eight week period following the disbursement of funds under the SBA Loan: (1) payroll costs; (2) any payment of a covered rent obligation and (3) any covered utility payment.  The amount of the loan forgiveness will be calculated (and may be reduced) in accordance with the requirements of the Paycheck Protection Program, including the provisions of Section 1106 of the CARES Act.  Not more than 25% of the amount forgiven can be attributable to non-payroll costs.

 

On April 24, 2020, the Company formed a wholly owned subsidiary, Koss Corp BV, in The Netherlands. The Company formed Koss Corp BV to comply with certain European Union requirements. The new entity is non-operating and holds no assets.

 

 

 

9.     SUPPLIER CONCENTRATION

 

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 75% 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.

 

 

 

10.    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 March 31, 2020, decreased $70,806 to $4,789,441, compared to the same quarter last year. For the nine months ended March 31, 2020, net sales decreased $1,693,451 to $14,362,862. Completion of an export OEM project last year and lower sales to European distributors caused the decreased sales.
 

Gross profit as a percent of net sales decreased for the three months ended March 31, 2020 compared to the same quarter last year. Gross profit fluctuations were primarily driven by a change in the mix of business by product, customer and sales channel.  A significant factor in the nine month decrease was the large back-to-school sale to a domestic retailer at low margin in the quarter ended September 30, 2019.
 

Selling, general and administrative expenses for the three months ended March 31, 2020, increased approximately 10% due to higher legal fees and employee benefits.  For the nine months ended March 31, 2020, the costs were similar to last year. 
 

Tax expense for the three and nine months ended March 31, 2020 was minimal due to an offsetting change in the valuation allowance for deferred tax assets.  The Company is not recording a tax benefit on the pretax loss because of the uncertainty in realizing the benefits of deferred tax assets.

 

Financial Results

 

The following table presents selected financial data for the third quarter:

   

Three Months Ended

   

Nine Months Ended

 
   

March 31

   

March 31

 

Financial Performance Summary

 

2020

   

2019*

   

2020

   

2019*

 

Net sales

  $ 4,789,441     $ 4,860,247     $ 14,362,862     $ 16,056,313  

Net sales (decrease) increase %

    (1.5 )%     10.7 %     (10.5 )%     (1.9 )%

Gross profit

  $ 1,589,776     $ 1,655,208     $ 4,301,318     $ 5,148,888  

Gross profit as % of net sales

    33.2 %     34.1 %     29.9 %     32.1 %

Selling, general and administrative expenses

  $ 1,687,676     $ 1,540,348     $ 4,938,983     $ 4,889,284  

Selling, general and administrative expenses as % of net sales

    35.2 %     31.7 %     34.4 %     30.5 %

Interest income

  $ 6,631     $ -     $ 19,955     $ -  

(Loss) income before income tax provision

  $ (91,269 )   $ 114,860     $ (617,710 )   $ 259,604  

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

    (1.9 )%     2.4 %     (4.3 )%     1.6 %
Income tax provision   $ 6,104     $ (23,020 )   $ 6,125     $ (22,995 )

Income tax provision as % of (loss) income before income tax

    (6.7 )%     (20.0 )%     (1.0 )%     (8.9 )%

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

 

2020 Results Compared with 2019

(comments refer to both the three and nine month periods unless otherwise noted)

 

For the three and nine months ended March 31, 2020, net sales declined 1.5% and 10.5%, respectively, due to a decrease in the export markets.  Sales in the domestic markets for the three and nine months ended March 31, 2020, increased 16.3% and 10.6%, respectively.

 

Net sales in the domestic market were approximately $4,201,000 in the three months ended March 31, 2020, compared to approximately $3,612,000 last year. For the nine months ended March 31, 2020, domestic net sales increased from approximately $10,653,000 to approximately $11,786,000.  Sales to mass retail customers increased in the nine months ended March 31, 2020 with a significant increase in the three months ended March 31, 2020.  Mass retail net sales included a large back-to-school promotion in the early part of the nine months ended March 31, 2020.  Sales through online channels increased significantly in the three and nine months ended March 31, 2020.  The online sales activity was driven by the COVID-19 directives, which have caused many people to work and study remotely and have resulted in sales of communication headsets to facilitate that work and study.  Education related customers showed strong sales increases year to date.  Certain domestic distributors and consumer direct customers had lower sales, but had higher activity late in the three months ended March 31, 2020 due to COVID-19 related customer demand.  

 

Export net sales decreased 52.8% to approximately $589,000 for the three months ended March 31, 2020, compared to approximately $1,249,000 for the same period last year.  For the nine months ended March 31, 2020, sales decreased 52.3% to approximately $2,577,000 from $5,403,000 last year.  Sales to an export OEM customer, for which the contract ended in December 2018, were approximately $973,000 in the first six months last year and accounted for a significant portion of the decrease in net sales.  Sales to distributors in Europe were the primary drivers for the remainder of the decrease. Management believes these declines were due to distributor efforts to optimize their investment in inventory, the negative impact the US dollar strength and timing of sales related to introduction of new products.

 

Gross profit decreased to 29.9% for the nine months ended March 31, 2020, compared to 32.1% for the nine months ended March 31, 2019.  The lower gross profit in the current year was largely due to the promotional back-to-school sale to a domestic mass retail customer at very low margin. For the three months ended March 31, 2020, gross profit decreased to 33.2% from 34.1% due to a less favorable mix of sales by market and product.

 

Selling, general and administrative expenses for the three months ended March 31, 2020, increased approximately $148,000 or 9.6% compared to the prior year.  For the nine months ended March 31, 2020, there was an increase of approximately $50,000 or 1.0% in selling general and administrative expenses.  For the three months ended March 31, 2020, the primary factors were an increase in legal and professional fees of approximately $55,000, an increase in employee benefit costs of approximately $24,000 and an increase in testing of new products of approximately $69,000.  For the nine months ended March 31, 2020, the increase was caused by higher legal and professional fees of approximately $134,000 for strengthening the Company's intellectual property portfolio, an increase in  testing of new products for approximately $82,000 and an increase in employee benefit costs of approximately $73,000.  The employee benefit costs were higher due to an increase in the Company match for the 401(k) plan.  These impacts were largely offset by a decrease of approximately $95,000 in deferred compensation expense and an increase of approximately $121,000 cash surrender value income.

 

 

Income tax provision for the three and nine months ended March 31, 2020 was generally 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 is not recording a tax benefit on the pretax loss because of the uncertainty in realizing the benefits of 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.

 

The Company has been closely monitoring the COVID-19 situation to protect the health and safety of its employees and customers.  Business plans are being executed to maintain supply of the Company’s products to our customers throughout the world.

 

The Company’s financial results for the quarter ended March 31, 2020 were positively impacted by the demand for specific communication headphones as more people were working from home and studying online.  Despite these sales, the Company recorded a loss for the quarter due to the drag on demand which was largely due to the COVID-19 impact as it spread across the world.  The increased domestic sales in the quarter ended March 31, 2020 resulted in shortages of certain products, which will take a couple months to replenish.  The retail businesses throughout the Company’s markets have seen severe curtailment of hours and complete closures.  This has resulted in a decline in business across our markets with the exception of on-line retail.  The Company expects these negative sales impacts to continue until markets re-open and consumer spending returns to normal. 

 

The magnitude of the COVID-19 pandemic, including the extent of any impact on the Company’s business, financial position, results of operations or liquidity, which could be material, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation. The Company's future results will be heavily determined by the duration of the pandemic, its geographic spread, further business disruptions and the overall impact on the global economy.

 

The Company’s supply chain is primarily in southern China.  This portion of the Company's supply chain was disrupted early in the quarter ended March 31, 2020.  These disruptions are now having little on-going impact.  The remaining impacts relate to the movement of new product introductions and costs. The Company is monitoring the situation closely and the supply chain team has been executing business plans, which include, but are not limited to: (1) being alert to potential short supply situations; (2) accelerating delivery times from key suppliers; and, (3) utilizing alternative sources and/or air freight.  The Company is committed to continuing to execute these plans and will remain in close contact with its supply chain to monitor future possible implications, especially on production facilities.

 

The Company’s financial position remains strong. The Company had $2.1 million of cash and available credit facilities of $5.0 million on March 31, 2020.  The Company also received funding under an SBA loan for $0.5 million to help mitigate the remaining impacts of the COVID-19 pandemic.

 

To protect the safety, health and well-being of employees, customers, and suppliers the Company continues to implement several preventive measures while also meeting the needs of global customers. They include increased frequency of cleaning and disinfecting of facilities, social distancing practices, remote working when possible, restrictions on business travel, cancellation of certain events and limitations on visitor access to facilities.

 

 

 

Liquidity and Capital Resources

 

Cash Flows

 

The following table summarizes cash flows from operating, investing and financing activities for the nine months ended March 31, 2020 and 2019:

 

Total cash provided by (used in):

 

2020

   

2019*

 

Operating activities

  $ 339,788     $ 1,836,408  

Investing activities

    (504,107 )     (241,723 )

Financing activities

    -       46,677  

Net (decrease) increase in cash and cash equivalents

  $ (164,319 )   $ 1,641,362  

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

 

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 nine months ended March 31, 2020. There was significant inventory inbound to the U.S. from China as of June 30, 2019 that was paid for during the quarter ended September 30, 2019.  The impact of these factors was partially offset by a decrease in inventories. 

  

Investing Activities

 

Cash used in investing activities was higher for the nine months ended March 31, 2020, 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 $600,000 to $800,000.  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 March 31, 2020, the Company had no outstanding borrowings on its bank line of credit facility. 

 

There were no purchases of common stock in 2020 or 2019 under the stock repurchase program.  Cash provided in 2019 was from stock options exercised which resulted in the issuance of 22,125 shares of common stock. No stock options were exercised in 2020.

 

 

 

 

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 available borrowings, 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 $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 March 31, 2020, and June 30, 2019, there were no outstanding borrowings on the facility. 

 

Contractual Obligation

 

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.

 

 

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 March 31, 2020.  The Company’s management has concluded that the Company’s disclosure controls and procedures as of March 31, 2020 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 March 31, 2020, the Company is currently involved in legal matters that are described in Note 10 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 nine months ended March 31, 2020, by the Company.

 

COMPANY REPURCHASES OF EQUITY SECURITIES

 

Period (2020)

 

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 - March 31

    -     $ -       -     $ 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 March 31, 2020.

 

 

 

Item 6.

Exhibits

 

Exhibit No.

Exhibit Description

 

 

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 March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2020 and June 30, 2019, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended March 31, 2020 and 2019 (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended March 31, 2020 and 2019, (iv) Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the three and nine months ended March 31, 2020 and 2019 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

May 8, 2020

Michael J. Koss

 

Chairman

 

Chief Executive Officer

 

 

 

 

 

/s/ David D. Smith

May 8, 2020

David D. Smith

 

Chief Financial Officer

 

Principal Accounting Officer

 

 

 

 

17

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