UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 for the quarterly period ended December 31, 2016September 30, 2017

OR

 

o    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)

 

 

 

 

 

 

 

 

KOSS CORPORATION

FORM 10-Q

INDEX

 

PART I

FINANCIAL INFORMATION

 

KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

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

KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

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

KOSS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The condensed consolidated balance sheet of Koss Corporation (the "Company") as of June 30, 2016,2017, 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 sixthree months ended December 31, 2016,September 30, 2017, are not necessarily indicative of the operating results that may be experienced for the full fiscal year ending June 30, 2017.2018.

 

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, 2016.2017.

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 six months ended December 31,September 30, 2016, and 2015, the costs incurred were for legal fees related to claims initiated against third parties (see Note 11)13). For the three and six months ended December 31,September 30, 2017 and 2016, and 2015, the costs and recoveries were as follows:

 

The components of inventories were as follows:

 

The Company files income tax returns in the United States federal jurisdiction and in several state jurisdictions.  The Company’s federal tax returns for tax years beginning July 1, 20122013 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, 20122013 and forward. For the three and six months ended December 31, 2016,September 30, 2017, the Company recorded an income tax expense of $82,494 and $126,425, respectively,$20,465, compared to an income tax expense of $248,845 and $187,445$43,931 for the three and six months ended December 31, 2015, respectively.September 30, 2016.

The Company does not believe it has any unrecognized tax benefits as of December 31, 2016September 30, 2017 and as of June 30, 2016.2017. Any changes to the Company’s unrecognized tax benefits as of December 31, 2016,September 30, 2017, if recognized, would impact the effective tax rate.

 

The Company incurs interest expense primarily related to its secured credit facility. Interest expense was $118$2,692 and $964$846 for the three and six months ended December 31,September 30, 2017 and 2016, respectively. For the three and six months ended December 31, 2015, interest expense was $757 and $6,075, respectively.

Accrued liabilities were as follows:

 

 

The Company recognizes stock-based compensation expense for options granted under both the 1990 Flexible Incentive Plan and the 2012 Omnibus Incentive Plan. The stock-based compensation relates to stock options granted to employees, non-employee directors and non-employee consultants. In the sixthree months ended December 31,September 30, 2017, 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 three months ended September 30, 2016, options to purchase 485,000 shares were granted under the 2012 Omnibus Incentive Plan at a weighted average exercise price of $2.33. In the six months ended December 31, 2015, options to purchase 390,000 shares were granted under the 2012 Omnibus Incentive Plan at a weighted average exercise price of $2.76. Stock-based compensation expense during the three and six months ended December 31, 2016September 30, 2017 was $88,522 and $177,045, respectively.$83,041. Stock-based compensation expense during the three and six months ended December 31, 2015September 30, 2016 was $129,404 and $245,408, respectively.$88,523.

 

The net changes in cash as a result of changes in operating assets and liabilities consist of the following:

 

The following table summarizes the changes in stockholders’ equity:

 

As of December 31, 2016,September 30, 2017, the Company is party to the following matter related to the unauthorized transactions described below:

The ultimate resolution of this matter is not determinable unless otherwise noted.

 

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.

 

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, active noise canceling headphones, and compact disc recordings of American Symphony Orchestras on the Koss Classics® label. The Company operates as one business segment.

Results of Operations Summary

Financial Results

The following table presents selected financial data for the three and six months ended December 31, 2016September 30, 2017 and 2015:2016:

20162017 Results Compared with 20152016

For the three months ended December 31, 2016,September 30, 2017, sales decreased compared4.4% to the same period last year. The decline of 7.5% was primarily due to a$6,066,630. A decline in sales to export distributors in Scandinaviageneral and an OEM customer in Asia were partially offset by increased sales to the OEM customer in Asia. For the six months ended December 31, 2016, sales increased 2.2% to $13,036,503. Sales to the OEM customer in Asia combined with improved sales to domestic distributors for the first six months more than offset the decline in sales to distributors in Scandinavia and Asia.customers.

Net sales in the domestic market were approximately $4,083,000$4,280,000 in the three months ended December 31, 2016,September 30, 2017, which is an increase from last year's approximately $3,775,000. For$3,872,000. Increased sales through mass retail and music stores were partially offset by a decline in sales to an OEM customer.

Export net sales decreased to approximately $1,787,000 for the sixthree months ended December 31, 2016,September 30, 2017, compared to approximately $2,477,000 for the domesticthree months ended September 30, 2016. Sales to distributors in Europe and Asia in general decreased, however the decrease was partially offset by increased sales increasedto the Scandinavian distributor as they started to replenish their inventory and add new items.

Selling, general and administrative expenses were consistent withfor the three months ended September 30, 2017 decreased compared to the prior year. IncreasedLower expense from higherfor incentive compensation, travel, salary and 401(k) match expense increased expense for testing relatedcontributed to new product introductions, and higher deferred compensation expense were partially offset by lower expense for stock-based compensation and a higher increase in cash surrender value of life insurance.this decrease.

Interest expense for the three and six months ended December 31, 2016September 30, 2017 was lowerhigher than the same periodsperiod last year due to positivemore extended periods of borrowing to cover timing differences between cash flows from operations which resulted in limited borrowing on the Company's bank line of credit facility.provided and used by operations.

 

The effective income tax rate for the sixthree months ended December 31, 2016,September 30, 2017, was 36.0%53.9%, which is comprised of the U.S. federal statutory rate of 34%, plus an increase caused by a permanent tax difference related to stock-based compensation, and the effect of state income taxes. It is anticipated that the effective income tax rate will be approximately 38-40%50-54% for the year ending June 30, 2017.2018

Liquidity and Capital Resources

 

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the sixthree months ended December 31, 2016September 30, 2017 and 2015:2016:

Operating Activities

 

In the six months ended December 31, 2016, the cash generatedAn increase in accounts payable partially offset by operations declined $980,522 as compared to the same period last year. Approximately $800,000 of this change is due to advance customer payments receivedan increase in the six months ended December 31, 2015 for product that shipped inprepaid expenses during the three months ended March 31, 2016.September 30, 2017, drove the increase in cash provided by operating activities.

Investing Activities

 

Cash used in investing activities was higherlower for the sixthree months ended December 31, 2016,September 30, 2017, as the Company increasedhad decreased expenditures for tooling related to new product introductions. TheDuring the fiscal year ending June 30, 2018, the Company anticipates it will incur total expenditures of approximately $700,000 to $900,000 for tooling, leasehold improvements and capital expenditures during thesimilar to last fiscal year ending June 30, 2017.year.  The Company expects to generate sufficient cash flow through operations or through the use of its credit facility to fund these expenditures.

 

Financing Activities

 

As of December 31,September 30, 2017 and 2016, and 2015, the Company had no outstanding borrowings on its bank line of credit facility.

 

Liquidity

 

The Company's capital expenditures are primarily for 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 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 and letters of credit for the benefit of the Company of up to a sublimit of $2,000,000.  On July 23, 2014, the Credit Agreement was amended to lower the revolving credit line to $5,000,000 and to amend certain financial covenants. On May 31, 2016, the Credit Agreement was amended to extend the expiration to July 31, 2018, and to amend certain financial covenants. On October 31, 2016,June 29, 2017, the Credit Agreement was amended to amend certain reporting requirements.reduce the facility to $4,000,000 and to eliminate the financial covenants. The Company and the Lender also entered into the Pledge and Security Agreement dated May 12, 2010, under which the Company granted the Lender a security interest in substantially all of the Company’s assets in connection with the Company’s obligations under the Credit Agreement. The Company is currently in compliance with all covenants related to the Credit Facility. As of December 31, 2016September 30, 2017 and June 30, 2016,2017, there were no outstanding borrowings on the facility.

Off-Balance Sheet Arrangements

 

 

Not applicable. 

 

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 December 31, 2016.September 30, 2017.  The Company’s management has concluded that the Company’s disclosure controls and procedures as of December 31, 2016September 30, 2017 were effective.

 

Changes in Internal Control Over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

 

 

As of December 31, 2016,September 30, 2017, the Company is currently involved in legal matters that are described in Note 1113 to the condensed consolidated financial statements, which description is incorporated herein by reference.

 

Not applicable.

 

 

The following table presents information with respect to purchases of common stock of the Company made during the three months ended December 31, 2016,September 30, 2017, by the Company.

 

 

(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 December 31, 2016.September 30, 2017.

 

 

None.

 

 

Not applicable.

 

None.

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.