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 September 30, 20172018

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 BALANCE SHEETS

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

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 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, 2017,2018, 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 three months ended September 30, 2017,2018, are not necessarily indicative of the operating results that may be experienced for the full fiscal year ending June 30, 2018.2019.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant’sCompany’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2018.

REVENUE RECOGNITION — In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (Topic 606), Revenue from Contracts with Customers. This new standard supersedes nearly all existing revenue recognition guidance and provides a five-step analysis to determine when and how revenue is recognized. The underlying principle is to recognize revenue when promised goods or services transfer to the customer. The amount of revenue recognized is to reflect the consideration expected to be received for those goods or services.

REVENUE RECOGNITION — In May 2014, the Financial Accounting Standards Board (“FASB”) issued 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 retrospectivefull or cumulative effectmodified retrospective transition method. The Company will adoptadopted the new standard ineffective July 1, 2018, using the first quarter of fiscal 2019 and anticipates using thefull retrospective method.

LEASES — In February 2016, the FASB issued ASU 2016-02 (Topic 842), Leases. This new standard revises existing lease guidance and requires all operating leases to be recorded on a company's balance sheet as right-of-use assets and lease liabilities. The new guidance also requires additional disclosures about leases. The Company has begunelected to early adopt the assessmentstandard effective July 1, 2018, concurrent with the adoption of the new standard through reviewrelated to revenue recognition.

The adoption of customer contracts and identification of what performance obligations exist. The preliminary results of our assessment indicate that the Company does not expectnew lease standard had a material impact on the consolidated balance sheets but did not have an impact on the consolidated statements of operations. The impact on the Company's consolidated balance sheets was a result of recording the right-of-use asset and corresponding lease liability. Adoption of the new standard also required the Company to restate its previously reported results to include the recognition of right-of-use assets and lease liabilities for the prior year comparative period.

Adoption of the standards related to revenue recognition and leases had no impact on total cash provided by operating activities on the consolidated financial statements. The Company is continuing its assessment and may identify other impacts.statements of cash flows.

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 months ended September 30, 2016,2018, the costs incurred were for legal fees related to claims initiated against a third partiesparty (see Note 13)15). For the three months ended September 30, 20172018 and 2016,2017, 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 statute of limitations for the Company’s federal tax returns for tax years beginning July 1, 20132014 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, 20132014 or later.

On December 22, 2017, the Tax Cuts and forward.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%. For the three months ended September 30, 2017,2018, the Company recorded an income tax expense of $20,465,$25 compared to income tax expense of $43,931$25,692 for the three months ended September 30, 2016.2017. There was no tax expense in the three months ended September 30, 2018, related to the change in federal statutory tax rate.

The Company does not believe it has any unrecognized tax benefits as of September 30, 20172018, and as of June 30, 2017.2018. Any changes to the Company’s unrecognized tax benefits as of September 30, 2017,2018, if recognized, would impact the effective tax rate.

 

The Company incurs interest expense primarily related to its secured credit facility. Interest expense was $2,692 and $846 for the three months ended September 30, 2017 and 2016, 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.directors. In the three months ended September 30, 2018, options to purchase 535,000 shares were granted under the 2012 Omnibus Incentive Plan at a weighted average exercise price of $2.81. In the three months ended 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. InStock-based compensation expense during 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 $2.33.2018 was $96,801. Stock-based compensation expense during the three months ended September 30, 2017 was $83,041. Stock-based compensation expense during the three months ended September 30, 2016 was $88,523.

 

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

 

 

As of September 30, 2017,2018, the Company is party to the following matter related to the unauthorized transactionsmatters described below:

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

Results of Operations Summary

Financial Results

The following table presents selected financial data for the three months ended September 30, 20172018 and 2016:2017:

20172018 Results Compared with 20162017

For the three months ended September 30, 2017,2018, sales decreased 4.4%declined 4.9% due to $6,066,630. A declinea decrease in sales to export distributors in general and an OEM customer in Asia weredomestic mass retail partially offset by increased sales to domestic customers.in the export markets. In the export market, the increase was driven by distributors in Europe.

NetDomestic net sales in the domestic market weredecreased from approximately $4,280,000$4,289,000 in the three months ended September 30, 2017, which is an increase from last year'sto approximately $3,872,000. Increased$3,861,000 in the three months ended September 30, 2018. Decreased sales throughto mass retail, prison distributors, and music storescertain other distributors were partially offset by a declinean increase in sales to an OEM customer.education customer and online retail.

Export net sales decreasedincreased from approximately $1,777,000 to approximately $1,787,000$1,924,000 for the three months ended September 30, 2017 compared to approximately $2,477,000 for the three months ended September 30, 2016. Sales to distributorsand 2018, respectively. Distributors in Europe and AsiaAustralia drove the increase in general decreased, however the decrease was partially offset by increased sales to the Scandinavian distributor as they started to replenish their inventory and add new items.sales.

 

Gross profit decreasedincreased to 27.6%31.7% for the three months ended September 30, 2017,2018, compared to 30.6%27.7% for the three months ended September 30, 2016.2017. The lower gross profit in the prior year was largely due to mix of sales by product, customer and sales channel as well as a decrease is primarily driven by a reductionin obsolete inventory expense. The write-down of burden in inventory duringalso decreased compared to the three months ended September 30, 2017 assame period in the related product was sold.prior year and contributed to the increase in gross profit.

Selling, general and administrative expenses for the three months ended September 30, 2017 decreased2018, increased compared to the prior year. Lower expense for incentive compensation, travel, salaryA decrease in cash surrender value income and 401(k) match expense contributed to this decrease.an increase in legal fees was partially offset by a decrease in sales commissions.

 

Interest expense decreased compared to the same period in the prior year because the Company did not draw on its line of credit facility during the three months ended September 30, 2018.

Income tax expense for the three months ended September 30, 20172018, was higher than the same period last year due to more extended periods of borrowing to cover timing differences between cash provided and used by operations.

Liquidity and Capital Resources

 

The following table summarizes our cash flows from operating, investing and financing activities for the three months ended September 30, 20172018 and 2016:2017:

 

An increaseThe decrease in accounts payablereceivable, partially offset by an increase in prepaid expenses during the three months ended September 30, 2017,inventory and a decrease in accounts payable, drove the increase in cash provided by operating activities.activities during the three months ended September 30, 2018.

 

Cash used in investing activities was lower for the three months ended September 30, 2017,2018, as the Company had decreased expenditures for tooling related to new product introductions. During the fiscal year ending June 30, 2018,2019, the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures similar to last fiscal year.  The Company expects to generate sufficient cash flow through operations or through the use of its credit facility to fund these expenditures.

 

 

As of September 30, 20172018 and 2016,2017, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in 20172018 or 20162017 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 2017 or 2016.2017.

 

 

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.

 

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 May 31, 2016, the Credit Agreement was amended to extend the expiration to July 31, 2018, and to amend certain financial covenants. 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. 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.Agreement. As of September 30, 20172018 and June 30, 2017,2018, there were no outstanding borrowings on the facility.

 

Not applicable. 

 

 

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, 2017.2018.  The Company’s management has concluded that the Company’s disclosure controls and procedures as of September 30, 20172018 were effective.

 

 

There have not been anyno significant changes in ourthe Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f)Exchange Act Rules 13a–15(f) and 15d-15(f) of the Exchange Act)15d–15(f)) that occurred during the Company’s most recent fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting. The Company implemented internal controls to ensure management properly assessed the impact of the new accounting standards related to revenue recognition and leases on its consolidated financial statements to facilitate adoption of the standard on July 1, 2018. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of the new standard.

PART II

OTHER INFORMATION

 

 

As of September 30, 2017,2018, the Company is currently involved in legal matters that are described in Note 1315 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 September 30, 2017,2018, 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 September 30, 2017.2018.

 

 

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.