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 March 31, 20182019

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)

 

 

 

 

 

 

 

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).  Yes o No þ

 

KOSS CORPORATION

FORM 10-Q

INDEX

 

PART I

FINANCIAL INFORMATION

 

KOSS CORPORATION

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

KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (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 nine months ended March 31, 2018,2019, 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 willis to 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 adoptadopted the requirements of the new standard in the first quarter of fiscal 2019 and anticipateson July 1, 2018 using the full retrospective transition 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 ("ROU") assets and lease liabilities. The new guidance also requires additional disclosures about leases. The Company plans to early adoptadopted the requirements of the new standard inon July 1, 2018 using the firstmodified retrospective transition method. Prior period consolidated financial statements were restated to reflect modified retrospective adoption beginning with the Quarterly Report on Form 10-Q for the quarter of fiscal 2019.ended September 30, 2018.

The Company determines if a contract is a lease at the date of inception. The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly-owned by the former chairman, and has begundetermined that the assessmentlease is an operating lease.

REVENUE RECOGNITION — In May 2014, the FASB issued ASU 2014-09 (Topic 606), Revenue from Contracts with Customers. The Company adopted the new standard effective July 1, 2018, using the full retrospective method. Adoption of the new leaserevenue recognition standard through review of lease contracts and calculation of the required adjustments. The preliminary result of our assessment is that the Company expectsto restate its previously reported results for the prior year comparative period and had a material impact on the consolidated balance sheets but an overall immaterial impact on its consolidated statements of operationsincome and cash flows and related disclosures. The impact on the Company's consolidated balance sheets was a result of the adjustment to defer revenue from prior years and a corresponding adjustment to retained earnings.

 

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, 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.or later.

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, 2018,2019, the Company recorded an income tax expensebenefit of $5,126$23,020 and $3,048,208,$22,995, respectively, compareddue to refund of the AMT credits not recognized in prior years. This compare to income tax expense of $62,523$4,274 and $188,948$3,047,356 for the three and nine months ended March 31, 2017, respectively.2018. There was no tax expense in the three months ended March 31, 2019, related to the federal statutory tax rate of 21% due to tax net operating loss carryforwards being utilized. The income tax expense for the nine months ended March 31, 2018 includes $713,826 for the write-downwrite 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 threeAct 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.taxes. The valuation allowance was recorded due to uncertainty of the realizability ofability to realize the deferred tax assets.

The Company does not believe it has any unrecognized tax benefits as of March 31, 2018, and as of2019 or June 30, 2017.2018. Any changes to the Company’s unrecognized tax benefits as of March 31, 2018,2019, if recognized, would impact the effective tax rate.

 

The Company incurs interest expense primarily related to its secured credit facility. Interest expense was $5,218$0 and $964$5,218 for the three and nine months ended March 31, 2018, and 2017, respectively. There was no interest expense in the three and nine months ended March 31, 2018 and 2017.2019.

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.Plan ("2012 Plan"). The stock-based compensation relates to stock options granted to employees and non-employee directors. In the nine months ended March 31, 2019, options to purchase 585,000 shares were granted under the 2012 Plan at a weighted average exercise price of $2.79. 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. InStock-based compensation expense during the three and 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 $2.33.2019 was $97,830 and $292,186. 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.$248,624.

 

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

 

 

As of March 31, 2018,2019, the Company is party to the following matter related to the unauthorized transactionsmatters described below:

 

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. The Company operates as one business segment.

Results of Operations Summary

Financial Results

20182019 Results Compared with 20172018

For the three months ended March 31, 2018,2019, sales increased 10.7%. Net sales increased in both the export and domestic markets. For the nine months ended March 31, 2019 net sales declined 9.4%1.9% primarily due to overall decreasesa decrease in the export marketsdomestic mass retail customers and certain domestic distributors with these declines partially offset by increased sales in the domesticexport markets. In the export market the decrease was driven by an OEM customer in Asia. The increase

Net sales in the domestic market was driven bywere approximately $3,688,000 in the three months ended March 31, 2019, which is a 3.4% increase from last year's approximately $3,568,000. Net sales to mass retail. retail and certain distributors improved during the quarter. In addition, there have been strong sales to a direct to consumer customer.

For the nine months ended March 31, 2018,2019, domestic net sales decreased 8.6%from approximately $11,949,000 to $16,277,181. A declineapproximately $10,644,000. Declines in sales to exportmass retail customers and certain distributors accounted for most of the decrease in generalthe nine months ended March 31, 2019. Mass retail has been impacted by product placement and an OEM customer in Asia were partially offset by increaseddecreased sales to domestic customers, driven primarily by mass retailers.a retailer with financial difficulties. The decline of sales to certain distributors was partially due to competition in lower priced and low margin products where we increased pricing to improve margins.

DomesticExport net sales increased fromto approximately $3,103,000 in$1,172,000 for the three months ended March 31, 2017,2019, compared to approximately $3,526,000 in$821,000 for the three months ended March 31, 2018. Increased sales to mass retail, prison distributors, and an education customer were partially offset by a decline in sales to certain other distributors. For the nine months ended March 31, 2018, domestic net2019, sales increased to approximately $5,412,000 from $11,089,000approximately $4,416,000 last year. Sales to distributors in Europe, Asia and the South Pacific were the primary drivers of the increase. New product introductions, especially wireless models, were a big part of the increased sales. A portion of these increases was offset by declines at an OEM customer with a project that completed in the prior yearnine months ended March 31, 2019.

Gross profit increased to approximately $11,771,000. Increased sales through mass retail and prison distributors were partially offset by a decline in sales to certain distributors, a grocery chain and an education customer.

Selling, general and administrative expenses for the three and nine months ended March 31, 2018,2019, decreased compared to the prior year. Lower expense forDecreased benefit costs, lower sales commissions, incentive compensation, marketing,decreased engineering testing costs, and travel,lower professional fees caused the decline in expense. Benefit costs declined due to a decrease in the company match to the 401(k) plan and a medical insurance refund received in the three months ended December 31, 2018. Sales commissions were lower due to a decline in domestic sales and reduced commissions to certain outside sales representatives. In the three and nine months ended March 31, 2018, there was more new product engineering testing than was experienced this year. Professional fees were higher in the three and nine months ended March 31, 2018 relating to work performed on the Company's intellectual property. These spending decreases were partially offset by an increasea decline in legal fees, contributed to this decrease.

 

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. The incomeIncome tax expense for the nine months ended March 31, 2018,2019, was comprised of a blendedthe U.S. federal statutory rate of 27.5%, the write-down of deferred taxes to the new federal statutory rate of 21%, an increase in the valuation allowance to include all deferred tax assets due to uncertainty of the realizability of those assets, and the effect of state income taxes.taxes offset by an adjustment to the valuation allowance for deferred tax assets. A tax benefit was recognized related to the refund of AMT carry forward.

Liquidity and Capital Resources

 

The following table summarizes our cash flows from operating, investing and financing activities for the nine months ended March 31, 20182019 and 2017:2018:

 

The positive operating results plus the decrease in accounts receivable, and inventory, partially offset by a decreasean increase in accounts payable,inventory, drove the increase in cash provided by operating activities during the nine months ended March 31, 2018.2019.

 

Cash used in investing activities was lower for the nine months ended March 31, 2018,2019, 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 March 31, 20182019 and 2017,2018, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in 20182019 or 20172018 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 2018 or 2017.2018.

 

 

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 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 Agreement. As of March 31, 20182019 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 March 31, 2018.2019.  The Company’s management has concluded that the Company’s disclosure controls and procedures as of March 31, 20182019 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 standards 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 standards.

PART II

OTHER INFORMATION

 

 

As of March 31, 2018,2019, the Company is currently involved in the legal mattersmatter that areis described in Note 1312 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 March 31, 2018,2019, 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 March 31, 2018.2019.

 

 

None.

 

 

Not applicable.

 

__________________________

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.