KOSS CORP - Quarter Report: 2019 December (Form 10-Q)

 

 

 

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 December 31, 2019

 

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 January 27, 2020, there were 7,404,831 shares outstanding of the registrant’s common stock. 

 

 

KOSS CORPORATION

FORM 10-Q

December 31, 2019

 

INDEX

 

			Page
PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
		Condensed Consolidated Balance Sheets as of December 31, 2019 (Unaudited) and June 30, 2019	3
		Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended December 31, 2019 and 2018	4
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended December 31, 2019 and 2018	5
		Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Six Months Ended December 31, 2019 and 2018	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	13
	Item 4.	Controls and Procedures	13
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	14
	Item 1A.	Risk Factors	14
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14
	Item 6.	Exhibits	15

 

 

		(Unaudited)
		December 31, 2019				June 30, 2019*
ASSETS
Current assets:
Cash and cash equivalents		$	2,229,084			$	2,228,282
Accounts receivable, less allowance for doubtful accounts of $4,358 and $2,617, respectively			2,467,767				3,655,143
Inventories, net			6,701,311				6,851,448
Prepaid expenses and other current assets			234,613				133,889
Income taxes receivable			56,229				45,660
Total current assets			11,689,004				12,914,422
Equipment and leasehold improvements, net			940,364				890,110
Other assets:
Deferred income taxes			1,626				13,276
Operating lease right-of-use assets			2,716,532				2,847,846
Cash surrender value of life insurance			6,828,027				6,569,628
Total other assets			9,546,185				9,430,750
Total assets		$	22,175,553			$	23,235,282
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	829,274			$	1,436,373
Accrued liabilities			761,825				650,513
Deferred revenue			495,144				645,470
Operating lease liability			271,134				265,443
Total current liabilities			2,357,377				2,997,799
Long-term liabilities:
Deferred compensation			2,381,978				2,419,962
Deferred revenue			160,268				163,018
Operating lease liability			2,445,397				2,582,402
Total long-term liabilities			4,987,643				5,165,382
Total liabilities			7,345,020				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			6,618,029				6,333,135
Retained earnings			8,175,480				8,701,942
Total stockholders' equity			14,830,533				15,072,101
Total liabilities and stockholders' equity		$	22,175,553			$	23,235,282

 

		Three Months Ended								Six Months Ended
		December 31								December 31
		2019				2018*				2019				2018*
Net sales		$	4,162,659			$	5,411,227			$	9,573,421			$	11,196,066
Cost of goods sold			2,798,572				3,748,732				6,861,880				7,702,387
Gross profit			1,364,087				1,662,495				2,711,541				3,493,679
Selling, general and administrative expenses			1,586,705				1,559,346				3,251,305				3,348,935
(Loss) income from operations			(222,618	)			103,149				(539,764	)			144,744
Interest income			6,927				-				13,324				-
(Loss) income before income tax provision			(215,691	)			103,149				(526,440	)			144,744
Income tax provision			22				-				22				25
Net (loss) income		$	(215,713	)		$	103,149			$	(526,462	)		$	144,719
(Loss) income per common share:
Basic		$	(0.03	)		$	0.01			$	(0.07	)		$	0.02
Diluted		$	(0.03	)		$	0.01			$	(0.07	)		$	0.02
Weighted-average number of shares:
Basic			7,404,831				7,404,831				7,404,831				7,397,291
Diluted			7,404,831				7,413,391				7,404,831				7,423,517

 

		Six Months Ended
		December 31
		2019				2018*
Operating activities:
Net (loss) income		$	(526,462	)		$	144,719
Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery of) provision for doubtful accounts			(13,338	)			30,806
Depreciation of equipment and leasehold improvements			189,138				248,830
Stock-based compensation expense			284,894				251,169
Deferred income taxes			11,650				-
Change in cash surrender value of life insurance			(145,605	)			(24,744	)
Change in deferred compensation accrual			37,016				87,977
Deferred compensation paid			(75,000	)			(75,000	)
Net changes in operating assets and liabilities:
Accounts receivable			1,200,714				1,669,262
Inventories			150,137				(1,046,995	)
Prepaid expenses and other current assets			(100,724	)			(59,861	)
Income taxes receivable			(10,569	)			25
Accounts payable			(607,099	)			360,477
Accrued liabilities			111,312				(151,210	)
Deferred revenue			(153,076	)			(81,388	)
Net cash provided by operating activities			352,988				1,354,067
Investing activities:
Purchase of equipment and leasehold improvements			(239,392	)			(112,599	)
Life insurance premiums paid			(112,794	)			(122,915	)
Net cash (used in) investing activities			(352,186	)			(235,514	)
Financing activities:
Proceeds from exercise of stock options			-				46,677
Net cash provided by financing activities			-				46,677
Net increase in cash and cash equivalents			802				1,165,230
Cash and cash equivalents at beginning of period			2,228,282				1,081,533
Cash and cash equivalents at end of period		$	2,229,084			$	2,246,763

 

		Six Months Ended December 31, 2019
		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)			-				-				-				(526,462	)			(526,462	)
Stock-based compensation expense			-				-				284,894				-				284,894
Balance, December 31, 2019			7,404,831			$	37,024			$	6,618,029			$	8,175,480			$	14,830,533

		Six Months Ended December 31, 2018
		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			-				-				-				144,719				144,719
Stock-based compensation expense, as restated			-				-				251,169				-				251,169
Exercise of common stock options			22,125				110				46,567				-				46,677
Balance, December 31, 2018			7,404,831			$	37,024			$	6,068,623			$	8,540,672			$	14,646,319

		Three Months Ended December 31, 2019
		Common Stock								Paid in				Retained
		Shares				Amount				Capital				Earnings				Total
Balance, September 30, 2019			7,404,831			$	37,024			$	6,481,323			$	8,391,193			$	14,909,540
Net (loss)			-				-				-				(215,713	)			(215,713	)
Stock-based compensation expense			-				-				136,706				-				136,706
Balance, December 31, 2019			7,404,831			$	37,024			$	6,618,029			$	8,175,480			$	14,830,533

		Three Months Ended December 31, 2018
		Common Stock								Paid in				Retained
		Shares				Amount				Capital				Earnings				Total
Balance, September 30, 2018			7,404,831			$	37,024			$	5,940,096			$	8,437,523			$	14,414,643
Net income, as restated			-				-				-				103,149				103,149
Stock-based compensation expense, as restated			-				-				128,527				-				128,527
Balance, December 31, 2018			7,404,831			$	37,024			$	6,068,623			$	8,540,672			$	14,646,319

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A)  BASIS OF PRESENTATION

 

The condensed consolidated balance sheet as of December 31, 2019, the condensed consolidated statements of operations for the three and six months ended December 31, 2019 and 2018, the condensed consolidated statements of cash flows for the six months ended December 31, 2019 and 2018 and the condensed consolidated statements of stockholders' equity for the three and six months ended December 31, 2019 and 2018, 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 tax provision of $22 and $25 was recorded during the six months ended December 31, 2019 and 2018, respectively. No income tax benefit was recorded for the six months ended December 31, 2019, due to the uncertainty of utilizing the related deferred tax asset.  Utilization of net operating tax carryforwards and a full valuation allowance against deferred tax assets reduced the income tax expense to zero for the six months ended December 31, 2018.

 

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.

 

 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:

 

 

 

The impact of the change in principle on the Consolidated Statement of Operations for the three and six months ended December 31, 2018 was as follows:

 

 

 

 

The impact of the change in principle on the Consolidated Statement of Cash Flows for the six months ended December 31, 2018 was as follows:

 

 

 

3.    INVENTORIES

 

The components of inventories were as follows:

 

 

 

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 an $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 December 31, 2019, 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:

 

 

 

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 $278,577 and $312,041 in the six months ended December 31, 2019 and 2018, respectively, for performance obligations related to consumer and customer warranties.  The deferred revenue liability was $859,370 and $777,982 as of June 30, 2018 and December 31, 2018, respectively.

 

 

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:

 

*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.    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.