KOSS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

*As adjusted for change in accounting principle (Note 2)

 

 

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

 

 

KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

 

*As adjusted for change in accounting principle (Note 2)

 

 

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

 

 

KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

*As adjusted for change in accounting principle (Note 2)

 

 

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

 

 

KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

 

 

 

 

 

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

 

 

KOSS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

 

 

 

 

 

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.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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

 

	•	Net sales for the quarter ended September 30, 2019, decreased $374,077 to $5,410,762, compared to the same quarter last year.
	•	Gross profit as a percent of sales decreased for the three months ended September 30, 2019 compared to the same quarter last year. The lower margin was primarily driven by change in the mix of business by product, customer and sales channel.
	•	Selling, general and administrative expenses for the three months ended September 30, 2019, decreased compared to the same period in the prior year primarily due to a increase in cash surrender value income.
	•	Tax expense for the three months ended September 30, 2019, was minimal due to an offsetting change in the valuation allowance for deferred tax assets.

 

Financial Results

 

The following table presents selected financial data for the three months ended September 30, 2019 and 2018:

 

		Three Months Ended
		September 30
Financial Performance Summary		2019				2018
Net sales		$	5,410,762			$	5,784,839
Net sales (decrease) %			(6.5	)%			(4.9	)%
Gross profit		$	1,347,454			$	1,831,184
Gross profit as % of net sales			24.9	%			31.7	%
Selling, general and administrative expenses		$	1,664,600			$	1,789,589
Selling, general and administrative expenses as % of net sales			30.8	%			30.9	%
Interest income		$	6,397			$	-
(Loss) income before income tax provision		$	(310,749	)		$	41,595
(Loss) income before income tax as % of net sales			(5.7	)%			0.7	%
Income tax provision		$	-			$	25
Income tax provision as % of income before income tax			0	%			0	%

 

2019 Results Compared with 2018

 

For the three months ended September 30, 2019, sales declined 6.5% due to a decrease in the export markets.  Sales in the domestic markets increased over the same period last year.

 

Export net sales decreased from approximately $2,014,000 to approximately $907,000 for the three months ended September 30, 2019 compared to last year.  This quarter last year included approximately $653,000 of net sales related to a contract that ended in December 2018.   Sales to a distributor based in Scandinavia declined approximately $376,000.  The decline in Scandinavia was driven by a loss of product placement and the recent strength of the US dollar.

 

Domestic net sales increased to approximately $4,504,000 in the three months ended September 30, 2019, from approximately $3,771,000 in the three months ended September 30, 2018. Increased sales to mass retail to support back-to-school promotions added approximately $410,000 and increased sales to a direct to consumer customer added another approximately $187,000.  The direct to consumer increase in sales was due to a custom product that began shipping late in the prior fiscal year.

 

Gross profit decreased to 24.9% for the three months ended September 30, 2019, compared to 31.7% for the three months ended September 30, 2018. The lower gross profit in the current year was largely due to change in mix by products and customers.  The increased net sales for the back-to-school promotion products are at lower margin than the decreased sales to the export markets.

 

Selling, general and administrative expenses for the three months ended September 30, 2019, decreased compared to the prior year. An increase of approximately $120,000 cash surrender value income was the most significant factor.  Bad debt expense declined by approximately $40,000 this year compared to last year when the bad debt for a domestic mass retail customer was recorded as a result of a Chapter 11 filing.   Legal fees increased by approximately $42,000 primarily due to continued efforts to protect and support our intellectual property portfolio.

 

Income tax expense for the three months ended September 30, 2019, was comprised of the U.S. federal statutory rate of 21% and the effect of state income taxes fully offset by an adjustment to the valuation allowance for deferred tax assets.

 

The Company has launched a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio.  The Company has incurred costs and will continue to incur costs related to enforcing this program. These costs primarily relate to legal fees and other costs involved with the underlying efforts to enforce this portfolio.  Depending on the response to and the underlying results of the enforcement program, the Company may enter into licensing arrangements or initiate lawsuits as part of the Company’s efforts to enforce this program. If successful, the Company may receive royalties, offers to purchase its intellectual property, or other proceeds in amounts that could have a material effect on its financial statements.

 

 

 

 

Liquidity and Capital Resources

 

Cash Flows

 

The following table summarizes cash flows from operating, investing and financing activities for the three months ended September 30, 2019 and 2018:

 

Total cash provided by (used in):		2019				2018
Operating activities		$	(622,281	)		$	707,789
Investing activities			(276,514	)			(137,544	)
Financing activities			-				46,677
Net (decrease) increase in cash and cash equivalents		$	(898,795	)		$	616,922

 

Operating Activities

 

The decrease in accounts payable and the loss from operations were the driving factors for the decrease in cash provided by operating activities during the three months ended September 30, 2019.  There was significant inventory inbound to the U.S. from China as of June 30, 2019 that was paid for during the current quarter.  The impact of these factors was partially offset by a decrease in accounts receivable. 

  

Investing Activities

 

Cash used in investing activities was higher for the three months ended September 30, 2019, as the Company had increased expenditures for  leasehold improvements and for tooling related to new product introductions. During the fiscal year ending June 30, 2020, the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures of approximately $750,000  to $900,000.  The Company expects to generate sufficient cash flow through operations or through the use of its available cash and its credit facility to fund these expenditures.

 

Financing Activities

 

As of September 30, 2019 and 2018, the Company had no outstanding borrowings on its bank line of credit facility.

 

There were no purchases of common stock in 2019 or 2018 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 2019.

 

Liquidity

 

The Company's capital expenditures are primarily for leasehold improvements and 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 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 September 30, 2019, and June 30, 2019, there were no outstanding borrowings on the facility. 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable. 

 

 

Item 4.

Controls and Procedures

 

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 September 30, 2019.  The Company’s management has concluded that the Company’s disclosure controls and procedures as of September 30, 2019 were effective.

 

 

Changes in Internal Control Over Financial Reporting

 

There have been no significant changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

As of September 30, 2019, the Company is currently involved in legal matters that are described in Note 7 to the condensed consolidated financial statements, which description is incorporated herein by reference.

 

Item 1A.

Risk Factors

 

Not applicable.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table presents information with respect to purchases of common stock of the Company made during the three months ended September 30, 2019, by the Company.

 

COMPANY REPURCHASES OF EQUITY SECURITIES

 

Period (2019)		Total # of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plan (1)				Approximate Dollar Value of Shares Available under Repurchase Plan
July 1 - September 30			-			$	-				-			$	2,139,753

 

(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, 2019.

 

 

Item 6.

Exhibits

 

Exhibit No.	Exhibit Description
18.1	Preferability Letter
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer *
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer *
32.1	Section 1350 Certification of Chief Executive Officer **
32.2	Section 1350 Certification of Chief Financial Officer **
101	The following financial information from Koss Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three months ended September 30, 2019 and 2018 (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended September 30, 2019 and 2018 , (iv) Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the three months ended September 30, 2019 and 2018 and (v) the Notes to Condensed Consolidated Financial Statements (Unaudited). *

 

__________________________

*	Filed herewith
**	Furnished herewith

 

 

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.

 

 

KOSS CORPORATION
/s/ Michael J. Koss	November 12, 2019
Michael J. Koss
Chairman
Chief Executive Officer
/s/ David D. Smith	November 12, 2019
David D. Smith
Chief Financial Officer
Principal Accounting Officer

 

 

 

15

 

Exhibit 18.1—Preferability Letter

 

The Board of Directors

Koss Corporation and Subsidiary

Milwaukee, Wisconsin

 

 

We have been furnished with a copy of the quarterly report on Form 10-Q of Koss Corporation and Subsidiary (the Company) for the three months ended September 30, 2019 and have read the Company’s statements contained in note 2 to the consolidated financial statements included therein. As stated in note 2, the Company changed its method of recognizing stock-based compensation expense to account for forfeitures as they occur. Under the previous policy stock-based compensation expense was accounted for by applying an estimated forfeiture rate. The Company states the new policy of recognizing stock-based compensation expense is preferable because it better aligns with the number of awards that actually vest in a given period. In accordance with your request, we have reviewed and discussed with Company officials the circumstances, business judgment and planning upon which the decision to make this change in the method of accounting was based.

 

We have not audited any financial statements of the Company as of any date or for any period subsequent to June 30, 2019, nor have we audited the information set forth in the aforementioned note 2 to the consolidated financial statements; accordingly, we do not express an opinion concerning the factual information contained therein.

 

With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of the Company’s compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter.

 

Based on our review and discussion, with reliance on management’s business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company’s circumstances.

 

/s/ Wipfli LLP

 

Milwaukee, Wisconsin

November 12, 2019

 

Exhibit 31.1

 

Certification of Chief Executive Officer 

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Michael J. Koss, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Koss Corporation;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the condensed financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its subsidiary, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.	I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Dated: November 12, 2019
/s/ Michael J. Koss
Michael J. Koss
Chairman and Chief Executive Officer

 

Exhibit 31.2

 

Certification of Chief Financial Officer 

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, David D. Smith, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Koss Corporation;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the condensed financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its subsidiary, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.	I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Dated: November 12, 2019
/s/ David D. Smith
David D. Smith
Chief Financial Officer

 

Exhibit 32.1

 

Certification of Chief Executive Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,

18 U.S.C. Section 1350

 

I, Michael J. Koss, Chief Executive Officer of Koss Corporation (the “Company”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that to my knowledge:

 

(i) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

	/s/ Michael J. Koss
	Michael J. Koss
	Chairman and Chief Executive Officer
	Dated: November 12, 2019

 

 

Note:  This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent required by the Sarbanes-Oxley Act of 2002, by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

Exhibit 32.2

 

Certification of Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 

18 U.S.C. Section 1350

 

I, David D. Smith, Chief Financial Officer of Koss Corporation (the “Company”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that to my knowledge:

 

(i) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

	/s/ David D. Smith
	David D. Smith
	Chief Financial Officer
	Dated: November 12, 2019

 

 

Note:  This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent required by the Sarbanes-Oxley Act of 2002, by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.