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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, 2021

 

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 Stock, par value $0.005 per share

KOSS

Nasdaq Capital Market

 

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. 

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

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 31, 2022, there were 9,147,795 shares outstanding of the registrant’s common stock. 

  


KOSS CORPORATION

FORM 10-Q

December 31, 2021

 

INDEX

 

 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

3

 

Item 1.

Financial Statements (Unaudited)

3

 

 

Condensed Consolidated Balance Sheets as of December 31, 2021 and June 30, 2021

3

 

 

Condensed Consolidated Statements of Income for the Three and Six Months Ended December 31, 2021 and 2020

4

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2021 and 2020

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended December 31, 2021 and 2020

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

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

12

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

17

 

Item 4.

Controls and Procedures

17

PART II

OTHER INFORMATION

17

 

Item 1.

Legal Proceedings

17

Item 1A.

Risk Factors

17

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

17

 

Item 6.

Exhibits

19

 

2


PART I

FINANCIAL INFORMATION

Item 1.    Financial Statements

 

KOSS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

December 31, 2021

June 30, 2021

ASSETS

Current assets:

Cash and cash equivalents

$

7,788,804

$

6,950,215

Accounts receivable, less allowance for doubtful accounts of $5,736 and $41,499, respectively

1,458,066

2,240,785

Life insurance receivable

2,007,769

Inventories, net

7,746,449

5,901,512

Prepaid expenses and other current assets

470,561

456,004

Total current assets

19,471,649

15,548,516

Equipment and leasehold improvements, net

1,195,240

1,281,180

Other assets:

Operating lease right-of-use asset

2,162,513

2,305,455

Cash surrender value of life insurance

5,701,844

7,188,994

Total other assets

7,864,357

9,494,449

Total assets

$

28,531,246

$

26,324,145

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

866,195

$

398,433

Accrued liabilities

751,643

665,567

Deferred revenue

606,794

694,632

Operating lease liability

295,144

288,949

Income taxes payable

6,605

4,543

Total current liabilities

2,526,381

2,052,124

Long-term liabilities:

Deferred compensation

2,264,909

2,491,482

Deferred revenue

164,745

188,932

Operating lease liability

1,867,369

2,016,506

Total long-term liabilities

4,297,023

4,696,920

Total liabilities

6,823,404

6,749,044

Stockholders' equity:

Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 9,147,795 and 8,608,706, respectively

45,739

43,044

Paid in capital

12,452,554

10,802,118

Retained earnings

9,209,549

8,729,939

Total stockholders' equity

21,707,842

19,575,101

Total liabilities and stockholders' equity

$

28,531,246

$

26,324,145

 

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

3


KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

Three Months Ended

Six Months Ended

December 31

December 31

2021

2020

2021

2020

Net sales

$

4,415,886

$

4,929,789

$

8,780,953

$

10,138,084

Cost of goods sold

2,866,193

3,311,892

5,649,423

6,883,960

Gross profit

1,549,693

1,617,897

3,131,530

3,254,124

Selling, general and administrative expenses

1,229,294

1,615,824

3,010,091

3,121,595

Income from operations

320,399

2,073

121,439

132,529

Other income

255,975

506,700

355,975

506,700

Interest income

3,626

2,660

4,258

609

Income before income tax provision

580,000

511,433

481,672

639,838

Income tax provision

1,031

2,543

2,062

4,019

Net income

$

578,969

$

508,890

$

479,610

$

635,819

Income per common share:

Basic

$

0.06

$

0.07

$

0.05

$

0.09

Diluted

$

0.06

$

0.07

$

0.05

$

0.09

Weighted-average number of shares:

Basic

9,144,099

7,405,758

8,994,023

7,405,295

Diluted

10,064,713

7,453,450

10,062,915

7,424,239

 

 

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

4


KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

Six Months Ended

December 31

2021

2020

Operating activities:

Net income

$

479,610

$

635,819

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

(Recovery of) provision for doubtful accounts of accounts receivable

(35,764)

8,108

Depreciation of equipment and leasehold improvements

161,095

153,559

Stock-based compensation expense

262,785

309,756

Change in cash surrender value of life insurance

(168,756)

(158,521)

Provision for deferred compensation

167,560

58,000

Deferred compensation paid

(71,250)

(75,000)

Deferred compensation relieved

(472,883)

Other income - SBA loan forgiveness

(506,700)

Other income - Net gain from life insurance benefits

(255,975)

Net changes in operating assets and liabilities:

Accounts receivable

818,483

(234,090)

Inventories

(1,844,937)

(264,220)

Prepaid expenses and other current assets

(14,557)

(135,479)

Income taxes receivable

4,019

Income taxes payable

2,062

Accounts payable

467,762

282,535

Accrued liabilities

236,076

474,481

Deferred revenue

(112,025)

232,413

Net cash (used in) provided by operating activities

(380,714)

784,680

Investing activities:

Purchase of equipment and leasehold improvements

(75,155)

(374,558)

Life insurance premiums paid

(95,888)

(103,730)

Net cash (used in) investing activities

(171,043)

(478,288)

Financing activities:

Proceeds from exercise of stock options

1,390,346

88,918

Net cash provided by financing activities

1,390,346

88,918

Net increase in cash and cash equivalents

838,589

395,310

Cash and cash equivalents at beginning of period

6,950,215

3,999,409

Cash and cash equivalents at end of period

$

7,788,804

$

4,394,719

Non-cash financing and investing activity:

Reclassification of cash surrender value of life insurance to life insurance receivable

$

1,751,794

$

 

 

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

5


KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

Six Months Ended December 31, 2021

Common Stock

Paid in

Retained

Shares

Amount

Capital

Earnings

Total

Balance, June 30, 2021

8,608,706

$

43,044

$

10,802,118

$

8,729,939

$

19,575,101

Net income

479,610

479,610

Stock-based compensation expense

262,785

262,785

Stock option exercises

539,089

2,695

1,387,651

1,390,346

Balance, December 31, 2021

9,147,795

$

45,739

$

12,452,554

$

9,209,549

$

21,707,842

Six Months Ended December 31, 2020

Common Stock

Paid in

Retained

Shares

Amount

Capital

Earnings

Total

Balance, June 30, 2020

7,404,831

$

37,024

$

6,882,729

$

8,236,345

$

15,156,098

Net income

635,819

635,819

Stock-based compensation expense

309,756

309,756

Stock option exercises

42,658

213

88,705

88,918

Balance, December 31, 2020

7,447,489

$

37,237

$

7,281,190

$

8,872,164

$

16,190,591

Three Months Ended December 31, 2021

Common Stock

Paid in

Retained

Shares

Amount

Capital

Earnings

Total

Balance, September 30, 2021

9,137,795

$

45,689

$

12,302,395

$

8,630,580

$

20,978,664

Net income

578,969

578,969

Stock-based compensation expense

123,909

123,909

Stock option exercises

10,000

50

26,250

26,300

Balance, December 31, 2021

9,147,795

$

45,739

$

12,452,554

$

9,209,549

$

21,707,842

 

Three Months Ended December 31, 2020

Common Stock

Paid in

Retained

Shares

Amount

Capital

Earnings

Total

Balance, September 30, 2020

7,404,831

$

37,024

$

7,035,723

$

8,363,274

$

15,436,021

Net income

508,890

508,890

Stock-based compensation expense

156,762

156,762

Stock option exercises

42,658

213

88,705

88,918

Balance, December 31, 2020

7,447,489

$

37,237

$

7,281,190

$

8,872,164

$

16,190,591

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

 

 

6


KOSS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(Unaudited)

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A)    BASIS OF PRESENTATION

 

The condensed consolidated balance sheets as of December 31, 2021 and June 30, 2021, the condensed consolidated statements of income for the three and six months ended December 31, 2021 and 2020, the condensed consolidated statements of cash flows for the six months ended December 31, 2021 and 2020, and the condensed consolidated statements of stockholders' equity for the three and six months ended December 31, 2021 and 2020, 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, 2021.

 

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 $1,031 and $2,062 was recorded for the three and six months ended December 31, 2021.  For the three and six months ended December 31, 2020, the state tax provision was $2,543 and $4,019, respectively. The federal income tax expense was zero for the three and six months ended December 31, 2021 and the three and six months ended December 31, 2020.

In the six months ended December 31, 2021, stock option exercises resulted in tax deductible compensation expense of approximately $8,000,000. The deduction of this stock option exercise compensation expense is expected to cause a tax loss in the year ended June 30, 2022, which will be carried forward to future tax years. The tax loss carryforward for the year ending June 30, 2022, including the stock-based compensation expense deductions in the six months ended December 31, 2021, is expected to be approximately $39,800,000. The additional estimated tax loss carryforward increased the deferred tax asset to approximately $12,000,000 as of December 31, 2021, and the future realization of this is uncertain. The valuation allowance was increased to fully offset the deferred tax asset.

C) OTHER INCOME

In December 2021, the Company recognized approximately $256,000 of other income related to the proceeds from company-owned life insurance policies on its founder, who passed away on December 21, 2021.

In July 2021, the Company entered into a license agreement with a headphone manufacturer (whereby the manufacturer licensed the use of certain patents in certain of their headphones). The one-time license fee of $100,000 was also treated as other income. Other income is shown as a separate line on the condensed consolidated statement of income. There was a related payment of $100,000 to a third party that was charged to legal expense in the first quarter.

D) DEFERRED COMPENSATION

The Company’s deferred compensation liabilities are for a current and former officer and are calculated based on various assumptions which may include compensation, years of service, expected retirement date, discount rates, and mortality tables. The related expense is calculated using the net present value of the expected payments and is included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations. The Company’s current and non-current compensation obligations are included in accrued liabilities and deferred compensation, respectively, in the Condensed Consolidated Balance Sheets.

7


In December 2021, the Company’s founder and former officer passed away. The Company had a total deferred compensation liability of $472,883 recorded at June 30, 2021 related to the former officer, which at his death was relieved. Deferred compensation income of $472,883 was recognized in selling, general and administrative expenses as a result. Payments of $71,250 made under this arrangement during the six months ended December 31, 2021 were expensed as paid. The remaining deferred compensation liability of $2,264,909 and $2,168,599 recorded at December 31, 2021 and June 30, 2021, respectively, relates to the current officer’s plan. Deferred compensation expense of $45,000 and $96,310 was recognized under this arrangement in the three and six months ended December 31, 2021.

 

 

2.    INVENTORIES

 

The components of inventories were as follows:

 

December 31, 2021

June 30, 2021