NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)
1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet of Koss Corporation (the "Company") as of
June 30, 2017
, has been derived from audited financial statements. The unaudited condensed consolidated financial statements presented herein are based on interim amounts. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The operating results for the
nine months ended March 31, 2018
, are not necessarily indicative of the operating results that may be experienced for the full fiscal year ending
June 30, 2018
.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2017
.
2.
NEW ACCOUNTING PRONOUNCEMENTS
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 will reflect the consideration expected to be received for those goods or services. The new standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts. The standard permits the use of either the full or modified retrospective transition method. The Company will adopt the new standard in the first quarter of fiscal 2019 and anticipates using the full retrospective method.
The Company has begun the assessment of the new revenue standard through review of customer contracts, identification of what performance obligations exist, and calculation of the required adjustments. The preliminary results of our assessment indicate that the Company expects an immaterial impact on its consolidated financial statements and related disclosures. The Company is continuing its assessment and may identify other impacts.
In February 2016, the FASB issued ASU 2016-02 (Topic 842), Leases. This new standard revises existing lease guidance and requires all leases to be recorded on a company's balance sheet as right-of-use assets and lease liabilities. The new guidance also requires additional disclosures about leases. The Company plans to early adopt the new standard in the first quarter of fiscal 2019.
The Company has begun the assessment of the new lease standard through review of lease contracts and calculation of the required adjustments. The preliminary result of our assessment is that the Company expects an immaterial impact on its consolidated statements of operations and a material impact as a result of recording the right-of-use asset and corresponding lease liability on the Company's consolidated balance sheets. The Company is continuing its assessment and may identify other impacts.
3.
UNAUTHORIZED TRANSACTION RELATED COSTS AND RECOVERIES
In December 2009, the Company learned of significant unauthorized transactions as previously reported. The Company has ongoing costs and recoveries associated with the unauthorized transactions. For the
three and nine months ended March 31, 2017
, the costs incurred were for legal fees related to claims initiated against a third party (see Note
13
). For the
three and nine months ended March 31, 2018 and 2017
, the costs and recoveries were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31
|
|
March 31
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Legal fees incurred
|
|
$
|
—
|
|
|
$
|
40,000
|
|
|
$
|
—
|
|
|
$
|
77,500
|
|
Proceeds from asset forfeitures
|
|
(1,265
|
)
|
|
(337
|
)
|
|
(17,445
|
)
|
|
(3,741
|
)
|
Unauthorized transaction related (recoveries) costs, net
|
|
$
|
(1,265
|
)
|
|
$
|
39,663
|
|
|
$
|
(17,445
|
)
|
|
$
|
73,759
|
|
4.
INVENTORIES
The components of inventories were as follows:
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|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
June 30, 2017
|
Raw materials
|
|
$
|
2,741,338
|
|
|
$
|
2,900,499
|
|
Work-in process
|
|
5,644
|
|
|
—
|
|
Finished goods
|
|
6,278,088
|
|
|
7,895,561
|
|
|
|
9,025,070
|
|
|
10,796,060
|
|
Allowance for obsolete inventory
|
|
(2,668,614
|
)
|
|
(2,450,717
|
)
|
Total inventories
|
|
$
|
6,356,456
|
|
|
$
|
8,345,343
|
|
5.
INCOME TAXES
The Company files income tax returns in the United States federal jurisdiction and in several state jurisdictions. The statute of limitations for the Company’s federal tax returns for tax years beginning July 1, 2014 or later are open. For states in which the Company files state income tax returns, the statute of limitations is generally open for tax years ended June 30, 2014 and forward.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Tax Act”) was signed. The Tax Act significantly changed the income tax environment for US corporations, including the reduction of the US federal corporate tax rate from 35% to 21%. Accordingly, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. For the
three and nine months ended March 31, 2018
, the Company recorded an income tax expense of
$5,126
and
$3,048,208
, respectively, compared to income tax expense of
$62,523
and
$188,948
for the
three and nine months ended March 31, 2017
, respectively. The income tax expense for the
nine months ended March 31, 2018
includes
$713,826
for the write-down of deferred income taxes due to the change in federal statutory tax rate as a result of the passage of the Tax Act. There was no tax expense in the
three months ended March 31, 2018
, related to the change in federal statutory tax rate. Income tax expense for the
three and nine months ended March 31, 2018
, also includes
$187,846
and
$2,429,235
, respectively, related to the recording of a valuation allowance for all deferred tax assets. The valuation allowance was recorded due to uncertainty of the realizability of the deferred tax assets.
The Company does not believe it has any unrecognized tax benefits as of
March 31, 2018
, and as of
June 30, 2017
. Any changes to the Company’s unrecognized tax benefits as of
March 31, 2018
, if recognized, would impact the effective tax rate.
6.
CREDIT FACILITY
On May 12, 2010, the Company entered into a secured credit facility (“Credit Agreement”) with JPMorgan Chase Bank, N.A. (“Lender”). The Credit Agreement provided for an
$8,000,000
revolving secured credit facility with interest rates either ranging from
0.0%
to
0.75%
over the Lender’s most recently publicly announced prime rate or
2.0%
to
3.0%
over LIBOR, depending on the Company’s leverage ratio. The Company pays a fee of
0.3%
to
0.45%
for unused amounts committed in the credit facility. On June 29, 2017, the Credit Agreement was amended to reduce the facility to
$4,000,000
and to eliminate the financial covenants. On May 9, 2018, the Credit Agreement was amended to extend the expiration to July 31, 2019. In addition to the revolving loans, the Credit Agreement also provides that the Company may, from time to time, request the Lender to issue letters of credit for the benefit of the Company of up to a sublimit of
$2,000,000
and subject to certain other limitations. The loan may be used only for general corporate purposes of the Company. The Company and the Lender also entered into the Pledge and Security Agreement dated May 12, 2010, under which the Company granted the Lender a security interest in substantially all of the Company’s assets in connection with the Company’s obligations under the Credit Agreement. The Company is currently in compliance with all covenants related to the Credit Agreement. As of
March 31, 2018
, and
June 30, 2017
, 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
and
$964
for the
nine months ended March 31, 2018 and 2017
, respectively. There was no interest expense in the
three months ended March 31, 2018
and
2017
.
7.
ACCRUED LIABILITIES
Accrued liabilities were as follows:
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|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
June 30, 2017
|
Cooperative advertising and promotion allowances
|
|
$
|
462,082
|
|
|
$
|
415,050
|
|
Product warranty obligations
|
|
193,578
|
|
|
220,541
|
|
Customer credit balances
|
|
344,663
|
|
|
21,175
|
|
Current deferred compensation
|
|
150,000
|
|
|
150,000
|
|
Accrued returns
|
|
48,508
|
|
|
53,915
|
|
Employee benefits
|
|
60,272
|
|
|
54,074
|
|
Legal and professional fees
|
|
66,000
|
|
|
86,500
|
|
Sales commissions and bonuses
|
|
130,347
|
|
|
83,654
|
|
Other
|
|
51,972
|
|
|
64,486
|
|
Total accrued liabilities
|
|
$
|
1,507,422
|
|
|
$
|
1,149,395
|
|
8.
LOSS PER COMMON AND COMMON STOCK EQUIVALENT SHARE
Basic loss per share is computed based on the weighted-average number of common shares outstanding. The weighted-average number of common shares outstanding was
7,382,706
for the periods ended
March 31, 2018
and
2017
. When dilutive, stock options are included in income per share as share equivalents using the treasury stock method. For the periods ended
March 31, 2018
and
2017
, there were no common stock equivalents related to stock option grants that were included in the computation of the weighted-average number of shares outstanding for diluted income per share. Shares issuable upon the exercise of outstanding options of
2,395,000
and
2,345,000
were excluded from the diluted weighted-average common shares outstanding for the periods ended
March 31, 2018
and
2017
, respectively, as they would be anti-dilutive.
9.
STOCK OPTIONS
The Company recognizes stock-based compensation expense for options granted under both the 1990 Flexible Incentive Plan and the 2012 Omnibus Incentive Plan. The stock-based compensation relates to stock options granted to employees and non-employee directors. In the
nine months ended March 31, 2018
, options to purchase
490,000
shares were granted under the 2012 Omnibus Incentive Plan at a weighted average exercise price of
$1.89
. In the
nine months ended March 31, 2017
, options to purchase
485,000
shares were granted under the 2012 Omnibus Incentive Plan at a weighted average exercise price of
$2.33
. Stock-based compensation expense during the
three and nine months ended March 31, 2018
was
$82,792
and
$248,624
, respectively. Stock-based compensation expense during the
three and nine months ended March 31, 2017
was
$88,523
and
$265,568
, respectively.
10.
ADDITIONAL CASH FLOW INFORMATION
The net changes in cash as a result of changes in operating assets and liabilities consist of the following:
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Nine Months Ended
|
|
|
March 31
|
|
|
2018
|
|
2017
|
Accounts receivable
|
|
$
|
919,927
|
|
|
$
|
585,803
|
|
Inventories
|
|
1,988,887
|
|
|
641,211
|
|
Prepaid expenses and other current assets
|
|
(123,671
|
)
|
|
(93,147
|
)
|
Income taxes receivable
|
|
5,951
|
|
|
529,378
|
|
Accounts payable
|
|
(1,414,569
|
)
|
|
(551,606
|
)
|
Accrued liabilities
|
|
358,027
|
|
|
(338,137
|
)
|
Other liabilities
|
|
(5,047
|
)
|
|
(11,656
|
)
|
Net change
|
|
$
|
1,729,505
|
|
|
$
|
761,846
|
|
|
|
|
|
|
Net cash paid (refunded) during the period for:
|
|
|
|
|
|
|
Income taxes
|
|
$
|
3,182
|
|
|
$
|
(523,342
|
)
|
Interest
|
|
$
|
5,218
|
|
|
$
|
964
|
|
11.
STOCKHOLDERS' EQUITY
The following table summarizes the changes in stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
March 31
|
|
|
2018
|
|
2017
|
Net (loss)
|
|
$
|
(3,733,089
|
)
|
|
$
|
(893,259
|
)
|
Stock-based compensation expense
|
|
248,624
|
|
|
265,568
|
|
(Decrease) in stockholders' equity
|
|
$
|
(3,484,465
|
)
|
|
$
|
(627,691
|
)
|
12.
COMMITMENTS AND CONTINGENCIES
The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly-owned by the former Chairman. On
January 5, 2017
, the lease was renewed for a period of
five
years, ending
June 30, 2023
, and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of
$380,000
per year. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership.
13.
LEGAL MATTERS
As of
March 31, 2018
, the Company is party to the following matter related to the unauthorized transactions described below:
|
|
•
|
On December 17, 2010, the Company filed an action against Park Bank in Circuit Court of Milwaukee County, Wisconsin alleging a claim of breach of the Uniform Fiduciaries Act relating to the unauthorized transactions, as previously reported. In 2015, Park Bank filed third party claims based on contribution and subrogation against Grant Thornton LLP and Michael Koss. The Court granted motions to dismiss the contribution claims against Grant Thornton LLP and Michael Koss, but determined that it was premature to decide the subrogation claims at this stage of the proceedings. On or around March 11, 2016, the Court entered an order granting Park Bank's motion for summary judgment that dismissed the case. On March 22, 2016, the Company filed a Notice of Appeal that appeals the order granting Park Bank's motion for summary judgment and the Court's denial of the motion to dismiss the subrogation claims. Park Bank also filed a cross–appeal that appeals the Court's order that granted the motions to dismiss the contribution claims against Grant Thornton LLP and Michael Koss. On December 12, 2017, the Court of Appeals issued its decision that affirmed the Circuit Court’s judgment dismissing the Company’s claim against Park Bank. The Company filed a Petition for Review of that decision before the Supreme Court of Wisconsin. On March 14, 2018, the Court granted the Petition. The case is currently pending before the Wisconsin Supreme Court.
|
The ultimate resolution of this matter is not determinable unless otherwise noted.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and possible litigation and assumptions relating to the foregoing. In addition, when used in this Form 10-Q, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “may,” “will,” “should,” “forecasts,” “predicts,” “potential,” “continue” and variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this Form 10-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, but are not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, the receptivity of consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition, pricing, the number and nature of customers and their product orders, production by third party vendors, foreign manufacturing, sourcing, and sales (including foreign government regulation, trade and importation concerns), borrowing costs, changes in tax rates, pending or threatened litigation and investigations, and other risk factors which may be detailed from time to time in the Company’s Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect new information.