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, 2020 

 

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)

 



 



 

Registrant’s telephone number, including area code: (414)  964-5000

 

Securities registered pursuant to Section 12(b) of the Act:

 



 

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 every Interactive Data File required to be submitted 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. 

 



 

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, 2021, there were 7,616,219 shares outstanding of the registrant’s common stock. 

  

 

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KOSS CORPORATION

FORM 10-Q

December 31, 2020

 

INDEX

 



 

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PART I

FINANCIAL INFORMATION

Item 1.    Financial Statements

 

KOSS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 



  

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

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KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 



 

 

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

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KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 



 

 

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

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KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 























 



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

 

 

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KOSS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

(Unaudited)

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A)    BASIS OF PRESENTATION

 

The condensed consolidated balance sheet as of December 31, 2020, the condensed consolidated statements of operations for the three and six months ended December 31, 2020 and 2019, the condensed consolidated statements of cash flows for the six months ended December 31, 2020 and 2019, and the condensed consolidated statements of stockholders' equity for the three and six months ended December 31, 2020 and 2019, 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, 2020.

 

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 state tax provision of $2,543 and $4,019 was recorded for the three and six months ended December 31, 2020,  respectively, for states where there is no net operating loss carryforward.  For the three and six months ended December 31, 2019, the state tax provision was $22.    In states with net operating loss carryforwards, utilization of net operating tax carryforwards and a full valuation allowance against deferred tax assets reduced the state income tax expense to zero for the three and six months ended December 31, 2020 and 2019.    Utilization of net operating tax carryforwards and a full valuation allowance against deferred tax assets reduced the federal income tax expense to zero for the three and six months ended December 31, 2020 and 2019.    



C)   OTHER INCOME



On November 3, 2020, the Company was notified that the full $506,700 of the SBA Loan (see Note 3) was forgiven.  The loan forgiveness has been treated as other income and shown as a separate line on the Condensed Consolidated Statements of Operations.  The Company followed the debt and debt extinguishment accounting model for the SBA Loan forgiveness.

 

  

2.    INVENTORIES

 

The components of inventories were as follows:

 







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3.    CREDIT FACILITY AND SBA LOAN

 

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 a $5,000,000 revolving secured credit facility with an interest rate 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.  On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50%.  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. As of December 31, 2020, the Company was in compliance with all covenants related to the Credit Agreement. As of December 31, 2020, and June 30, 2020, there were no outstanding borrowings on the facility. 

  

On April 13, 2020, the Company received an unsecured loan (the "SBA Loan") for $506,700 under the Small Business Administration ("SBA") Paycheck Protection Program (the “PPP”) of the CARES Act through Town Bank. On November 3, 2020, the Company was notified that the full principal amount of $506,700 has been forgiven and is recorded as other income in the Condensed Consolidated Statement of Operations. 





4.    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 $200,424 and $278,577 in the six months ended December 31, 2020 and 2019, respectively, for performance obligations related to consumer and customer warranties.  The deferred revenue liability was $808,488 as of June 30, 2019. The Company estimates that the deferred revenue performance obligations are satisfied within one to three years and therefore uses that same time frame for recognition of the deferred revenue.

  

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5.    INCOME (LOSS) PER COMMON AND COMMON STOCK EQUIVALENT SHARE

 

Basic income (loss) per share is computed based on the weighted-average number of common shares outstanding.  Diluted income (loss) 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 (loss) per share:





 

(1) Excludes approximately 2,490,061 and 2,842,875 weighted average stock options for the three months ended December 31, 2020 and 2019, respectively, as the impact of such awards was anti-dilutive. For the six months ended December 31, 2020 and 2019,  2,564,584 and 2,809,098 weighted average stock options were excluded, respectively.

  



6.    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.

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7.    LEGAL MATTERS

 

As of December 31, 2020, the Company is involved in the following matters described below:



•  In July 2020, the Company filed complaints in United States District Court against each of Apple Inc., Bose Corporation, PEAG, LLC d/b/a JLab Audio, Plantronics, Inc. and Polycom, Inc., and Skullcandy, Inc.  The complaints allege infringement on the Company’s patents relating to its wireless audio technology. In the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts may be due to third parties. The Company does not expect to incur additional fees and costs related to these lawsuits that will have a material impact to its financial statements. Depending on the response to and the underlying results of the enforcement program, the Company may continue to litigate its claims, enter into licensing arrangements or reach some other outcome potentially advantageous to its competitive position.



• Early in fiscal year 2020 the Company was notified by One E-Way, Inc. that some of the Company's wireless products may infringe on certain One E-Way patents. No lawsuits involving these allegations have yet been filed and served on the Company.    



The ultimate resolution of these matters is not determinable unless otherwise noted. We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving these claims against us, individually or in aggregate, will not have a material adverse impact on our Condensed 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,” “could,” “would,” “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),  the effects of the COVID-19 pandemic on the economy and the Company’s operations, borrowing costs, changes in tax rates, pending or threatened litigation and investigations, and other risk factors described in the Risk Factors and in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 and subsequently filed Quarterly Reports on Form 10-Q 



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.

 

 

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 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 recognized as a leader in the industry ever since. 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, as its principal business line is the design, manufacture and sale of stereo headphones and related accessories.

   





Financial Results

 

The following table presents selected financial data for the three and six months ended December 31, 2020 and 2019:







  

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2020 Results Compared with 2019

(comments refer to both the three and six month periods ended December 31unless otherwise noted)

 

 

For the three and six months ended December 31, 2020, net sales increased 18.4% and 5.9%, respectively.  This improvement in net sales was driven by increased sales to certain US distributors, acceleration of online sales and increased sales in Europe. 

 

Net sales in the domestic market were approximately $3,652,000 in the three months ended December 31, 2020, compared to approximately $3,102,000 in the prior year period.  Domestic net sales were approximately $7,599,000 in the six months ended December 31, 2020 compared to $7,642,000 in the prior year period.  Growth in the online sales channels and certain US-based distributors increased while sales in the mass retail and educational channels declined.  Sales through online channels increased by approximately 2.5 times compared to the prior year three month and six month periods.  The online sales activity was driven by COVID-19 directives, which have caused many people to work and study remotely and have resulted in sales of communication headsets to facilitate that work and study.  Certain domestic distributors had higher sales due to COVID-19 related customer demand.  Sales to mass retail customers decreased due to reduced product placement.  In addition, mass retail net sales included a large back-to-school promotion in the six months ended December 31, 2019 that did not take place in 2020.  Net sales in the educational markets, which primarily are driven by the need for headphones in testing services, declined as a result of timing of shipments.  There were large shipments at the end of our fiscal year ended June 30, 2020.

 

Export net sales increased 20.4% to approximately $1,277,000 for the three months ended December 31, 2020, compared to approximately $1,061,000 for the same period last year.  Net sales to export markets were approximately $2,539,000 in the six months ended December 31, 2020 compared to $1,931,000 in the prior year period.  Sales to distributors in Europe were the primary drivers for the increase. A significant portion of the increase was related to introduction of new products as well as increased sales of headphones used for working and studying remotely. 

 

Gross profit increased to 32.1% for the six months ended December 31, 2020, compared to 28.3% for the six months ended December 31, 2019.  Sales in the current year reflected a much more favorable mix by markets and products.  The higher gross profit in the current year was partially due to the promotional back-to-school sale to a domestic mass retail customer at very low margin in the six months ended December 31, 2019. 

 

Selling, general and administrative expenses for the three months ended December 31, 2020, increased approximately $29,000 or 1.8% compared to the prior year period.  The primary factors  were an increase in employee compensation costs, deferred compensation expenses and general insurance.  These costs were partially offset by lower legal expenses.    



For the six months ended December 31, 2020, selling, general and administrative expenses decreased 4% or approximately $129,000 compared to the same period last year.  Lower legal expenses were partially offset by higher general insurance premiums.

 

Income tax expense for the three and six months ended December 31, 2020, was comprised of the U.S. federal statutory rate of 21% and the effect of state income taxes offset by an adjustment to the valuation allowance for deferred tax assets. The effective tax rate was less than 1% in the three and six months ended December 31, 2020 and 2019. It is anticipated that the effective rate in the current year and future years will be reduced by utilization of a portion or all of the approximately $897,000 of federal net operating loss carryforwards.

 

As previously reported, the Company has launched a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has continued to enforce its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless headphone technology. If the program is successful, the Company may receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position; however, there is no guarantee of a positive outcome from these efforts, which could ultimately be time consuming and unsuccessful.  Additionally, in the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts may be due to third parties.



The Company believes that its financial position remains strong. The Company had $4.3 million of cash and available credit facilities of $5.0 million on December 31, 2020. 

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COVID-19 Impact



The Company has been closely monitoring the COVID-19 situation to protect the health and safety of its employees and customers.  Business plans are being executed to maintain supply of the Company’s products to our customers throughout the world.

 

The Company’s financial results for the quarter ended December 31, 2020 were positively impacted by the demand for specific communication headphones as more people were working from home and studying online due to COVID-19 related directives.  The increased domestic sales for these specific products in the quarter ended December 31, 2020 resulted in shortages of certain products, which will take a couple months to replenish.  However, certain retail businesses throughout the Company’s markets have seen continued disruption.  This has resulted in a decline in business across our markets with the exception of online retail.  The Company expects these negative sales impacts to continue until markets re-open and consumer spending returns to normal. 

 

The ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on the Company’s business, financial position, results of operations or liquidity, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation. The Company's future results will be heavily determined by the duration of the pandemic, its geographic spread, further business disruptions and the overall impact on the global economy.

 

The Company’s supply chain is primarily in southern China.  This portion of the Company's supply chain was disrupted early in the quarter ended March 31, 2020.  Until recently, these disruptions had little on-going impact.  In the most recent quarter, the Company began  experiencing extended lead times caused by shortages of ceratin key components.  There have also been impacts to the movement of new product introductions and costs. The Company is monitoring the situation closely and the supply chain team has modified business plans, which include, but are not limited to: (1) increasing the investment in inventory; (2) being alert to potential short supply situations; (3) assisting suppliers with acquisition of critical components; and (4) utilizing alternative sources and/or air freight.   



To protect the safety, health and well-being of employees, customers, and suppliers the Company continues to implement several preventive measures while also meeting the needs of global customers. They include increased frequency of cleaning and disinfecting of facilities, social distancing practices, remote working when possible, restrictions on business travel, holding certain events virtually and limitations on visitor access to facilities.



The Company is committed to continuing to execute these plans and will remain in close contact with its supply chain to monitor future possible implications, especially on production facilities.

 

 

Liquidity and Capital Resources

 

Cash Flows

 

The following table summarizes cash flows from operating, investing and financing activities for the six months ended December 31, 2020 and 2019:

 





 

Operating Activities

 

The increase in income from operations was the driving factor for the increase in cash provided by operating activities during the six months ended December 31, 2020.  The impact of the increased income from operations was partially offset by a decrease in the net changes in operating assets and liabilities. 

 

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Investing Activities

 

Cash used in investing activities was higher for the six months ended December 31, 2020, as the Company had increased expenditures for leasehold improvements and for tooling related to new product introductions. During the fiscal year ending June 30, 2021, the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures of approximately $600,000.  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 December 31, 2020, the Company had no outstanding borrowings on its bank line of credit facility. 

 

There were no purchases of common stock in the quarters ended December 31, 2020 or 2019 under the stock repurchase program. Cash provided in 2020 was from stock options exercised which resulted in the issuance of 42,658 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 available borrowings, 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 a $5,000,000 revolving secured credit facility with an interest rate 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. On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50%.  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, 2020, and June 30, 2020, there were no outstanding borrowings on the facility. 



Contractual Obligation

 

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.

  



Off-Balance Sheet Transactions

 

At December 31, 2020, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.



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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 December 31, 2020.  The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as of December 31, 2020 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



From time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During the period covered by this report, there were no material changes to the description of legal proceedings set forth in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.  

 

Item 1A.    Risk Factors



In addition to the other information set forth in this report, you should carefully consider the factors discussed under Part 1. Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, as filed with the Securities and Exchange Commission on August 27, 2020. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this report.  There have been no material changes to the risk factors described under “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

 

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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 December 31, 2020, by the Company.

  

COMPANY REPURCHASES OF EQUITY SECURITIES

 



 





Item 5.     Other Information



The following disclosure is included in this Quarterly Report on Form 10-Q in lieu of filing a Current Report on Form 8-K with respect to disclosure required under Item 1.01 thereof.



On January 28, 2021, the Company and Town Bank (“Lender”) entered into the First Amendment to Revolving Credit Agreement (the "Amendment"), which amended the Credit Agreement between the Company and the Lender dated May 14, 2019 (the “Credit Agreement”).  The Amendment extended the expiration date of the Credit Agreement to October 31, 2022 and changed the interest rate to Wall Street Journal Prime less 1.50%. The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Amendment, which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

 

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Item 6.    Exhibits





__________________________



*    Filed herewith

**  Furnished herewith

 

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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.

 



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FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT

THIS FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT (the “First Amendment”) is dated as of January 28, 2021 (the “Effective Date”), by and among KOSS CORPORATION, a Delaware Corporation (“Borrower”) and TOWN BANK, N.A. (also known as Town Bank, “Bank”; Borrower and Bank are collectively referred to herein as the “Parties”) and amends a “Revolving Credit Agreement” dated as of May 14, 2019 (the “Credit Agreement”).

RECITALS

A.     Borrower has requested and Bank has agreed, subject to the terms of this First Amendment, to: (i) amend the interest rate applicable to the Revolving Credit Note, and (ii) extend the Maturity Date of the Revolving Credit Note.

B.     Capitalized terms that are not otherwise defined herein shall take on the meaning given to such terms in the Credit Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and in consideration of the mutual agreements contained herein, the Parties agree as follows:

AMENDMENT

ARTICLE I.     AMENDMENT TO CREDIT AGREEMENT

1.     Amendment to Subsection 1.3(b) of the Credit Agreement. Subsection 1.3(b) of the Credit Agreement is hereby amended and restated in its entirety as follows:

(b)     The Revolving Credit Note shall accrue interest before the Maturity Date at an annual rate equal to the Prime Rate (as defined below) minus one hundred fifty (150) basis points (1.50%) which rate will change from time to time as of the first Business Day of each calendar month, if the Prime Rate has changed.

2.     Creation of Subsection 5.1(e) of the Credit Agreement. Subsection 5.1(e) of the Credit Agreement is hereby created as follows (and will be inserted immediately after Subsection 5.1(d) of the Credit Agreement):

(e)     Within forty-five (45) calendar days after the end of each calendar year, copies of life insurance policy illustrations for the following life insurance policies:

(i) #X-XXX-XXX (John C. Koss);

(ii) #XX-XXX-XXX (John C. Koss);

(iii) #XX-XXX-XXX (John C. Koss, Jr.);

(iv) #XX-XXX-XXX (Michael J. Koss);

(v) #XX-XXX-XXX (John C. Koss, Jr.); and

(vi) #XX-XXX-XXX (Michael J. Koss).

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3.     Amendment to Subsection 7.1(i) of the Credit Agreement. Subsection 7.1(i) of the Credit Agreement is hereby amended and restated in its entirety as follows:

(i)     “Maturity Date” means October 31, 2022.

4.     Amendment to Subsection 7.1(k) of the Credit Agreement. Subsection 7.1(k) of the Credit Agreement is hereby amended and restated in its entirety as follows:

(k)     Intentionally Deleted.

5.     Creation of Subsection 7.1(m-1) of the Credit Agreement. Subsection 7.1(m-1) of the Credit Agreement is hereby created as follows (and shall be inserted in between Subsections 7.1(m) and 7.1(n) of the Credit Agreement):

(m-1)     “Prime Rate” means the “prime rate” as published in the Wall Street Journal on the first Business Day of each calendar month and effective on the same day. Bank’s determination of the Prime Rate shall be conclusive and final, absent manifest error, and shall remain fixed during such one-month interest period. Notwithstanding any provision to the contrary herein, under no circumstance will the Prime Rate be less than 2.99% per annum.

ARTICLE II.         CONDITIONS

This First Amendment shall be effective upon the satisfaction of the following conditions:

1.     Amendment. Bank shall have received a fully-executed, original version of this First Amendment.

2.     Payment of Lender’s Fee and Costs. Bank shall have received payment in immediately available funds, of all fees and costs of Bank, including, without limitation, all attorneys’ fees and expenses incurred or paid by Bank in connection with the preparation of this First Amendment and all ancillary documents related hereto.

ARTICLE III.         MISCELLANEOUS

1.     Recitals. The RECITALS set forth above are true, accurate and incorporated into the body of this First Amendment by reference.

2.     Counterparts; Signatures. This First Amendment may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute but one and the same agreement. This First Amendment may be executed in facsimile or electronic copy with the same binding effect as the original, but any party may request a paper original for its files and the other parties hereto shall be obligated to accommodate such a request.

3.     Representation and Warranty. Borrower represents and warrants to Bank that the execution and delivery of this First Amendment is within its corporate power, has been duly authorized by proper organizational action on the part of Borrower, is not in violation of any existing law, rule or regulation of any governmental agency or authority, any order or decision of any court, the Articles of Incorporation or Bylaws of Borrower or the terms of any agreement, restriction or under-taking to which Borrower is a party or by which it is bound, and does not require any approval or consent of the board of directors or shareholders of Borrower, any governmental body, agency or authority or any other person or entity that have not already been obtained by Borrower.

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4.     Entire Agreement; Applicable Law. The Credit Agreement, as amended by this First Amendment is the entire agreement between the Parties with respect to the matters contained therein, the other Loan Documents, and herein, and this First Amendment supersedes any prior discussions with respect to such an amendment. This First Amendment shall be governed by and construed in accordance with the internal laws of the State of Wisconsin without application of conflicts of laws.

5.     Headings. Paragraph headings used in this First Amendment are for convenience only and shall not affect the construction of this First Amendment.

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IN WITNESS WHEREOF, the Parties have executed this First Amendment as of the Effective Date.



TOWN BANK, N.A.

By: /s/ Casey Wendt

Casey C. Wendt, Senior Vice President





KOSS CORPORATION, a Delaware corporation

By: /s/ David Smith

David Smith, CFO and Secretary



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Certification of Chief Executive Officer 

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

 

I, Michael J. Koss, certify that:

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

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.



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Certification of Chief Financial Officer 

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

 

I, David D. Smith, certify that:

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

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.



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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:

 

 

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.

 

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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:

 

 

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.

 

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