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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 March 31, 2022

 

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 May 2, 2022, there were 9,147,795 shares outstanding of the registrant’s common stock. 

  


KOSS CORPORATION

FORM 10-Q

March 31, 2022

 

INDEX

 

 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

3

 

Item 1.

Financial Statements (Unaudited)

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2022 and June 30, 2021

3

 

 

Condensed Consolidated Statements of Operations for the Three and Nine months Ended March 31, 2022 and 2021

4

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2022 and 2021

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine months Ended March 31, 2022 and 2021

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

18

 

Item 4.

Controls and Procedures

18

PART II

OTHER INFORMATION

18

 

Item 1.

Legal Proceedings

18

Item 1A.

Risk Factors

18

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

18

 

Item 6.

Exhibits

20

 

2


PART I

FINANCIAL INFORMATION

Item 1.    Financial Statements

 

KOSS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

March 31, 2022

June 30, 2021

ASSETS

Current assets:

Cash and cash equivalents

$

9,487,935

$

6,950,215

Accounts receivable, less allowance for doubtful accounts of $6,284 and $41,500, respectively

2,316,329

2,240,785

Inventories, net

7,750,800

5,901,512

Prepaid expenses and other current assets

460,949

456,004

Total current assets

20,016,013

15,548,516

Equipment and leasehold improvements, net

1,146,222

1,281,180

Other assets:

Operating lease right-of-use asset

2,089,896

2,305,455

Cash surrender value of life insurance

5,704,776

7,188,994

Total other assets

7,794,672

9,494,449

Total assets

$

28,956,907

$

26,324,145

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

774,483

$

398,433

Accrued liabilities

806,544

665,567

Deferred revenue

595,984

694,632

Operating lease liability

298,291

288,949

Income taxes payable

4,380

4,543

Total current liabilities

2,479,682

2,052,124

Long-term liabilities:

Deferred compensation

2,284,909

2,491,482

Deferred revenue

170,440

188,932

Operating lease liability

1,791,605

2,016,506

Total long-term liabilities

4,246,954

4,696,920

Total liabilities

6,726,636

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

12,571,779

10,802,118

Retained earnings

9,612,753

8,729,939

Total stockholders' equity

22,230,271

19,575,101

Total liabilities and stockholders' equity

$

28,956,907

$

26,324,145

 

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

3


KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

Three Months Ended

Nine Months Ended

March 31

March 31

2022

2021

2022

2021

Net sales

$

4,634,552

$

3,987,452

$

13,415,506

$

14,125,537

Cost of goods sold

2,671,336

2,569,900

8,320,759

9,453,860

Gross profit

1,963,216

1,417,552

5,094,747

4,671,677

Selling, general and administrative expenses

1,566,430

2,271,615

4,576,521

5,393,211

Income (loss) from operations

396,786

(854,063)

518,226

(721,534)

Other income

6,415

378,805

362,389

885,505

Interest income

3,578

1,139

7,837

1,748

Income (loss) before income tax provision

406,779

(474,119)

888,452

165,719

Income tax provision

3,575

49

5,638

4,068

Net income (loss)

$

403,204

$

(474,168)

$

882,814

$

161,651

Income (loss) per common share:

Basic

$

0.04

$

(0.06)

$

0.10

$

0.02

Diluted

$

0.04

$

(0.06)

$

0.09

$

0.02

Weighted-average number of shares:

Basic

9,147,795

8,100,730

9,044,532

7,633,722

Diluted

9,888,083

8,100,730

10,024,473

9,188,002

 

 

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

4


KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

Nine Months Ended

March 31

2022

2021

Operating activities:

Net income

$

882,814

$

161,651

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

(Recovery of) provision for doubtful accounts of accounts receivable

(35,216)

(171)

Depreciation of equipment and leasehold improvements

225,130

222,998

Stock-based compensation expense

382,010

464,032

Change in cash surrender value of life insurance

(171,688)

(169,963)

Provision for deferred compensation

187,560

173,000

Deferred compensation paid

(71,250)

(112,500)

Deferred compensation relieved

(472,883)

Other income - SBA loan forgiveness

(506,700)

Other income - Net gain from life insurance benefits

(262,391)

Loss on disposal of fixed assets

7,856

Net changes in operating assets and liabilities:

Accounts receivable

(40,328)

355,531

Inventories

(1,849,288)

(1,318,377)

Prepaid expenses and other current assets

(4,945)

(212,482)

Income taxes payable

(163)

4,068

Accounts payable

376,050

122,598

Accrued liabilities

290,977

230,915

Deferred revenue

(117,140)

150,041

Net cash provided by operating activities

(672,895)

(435,359)

Investing activities:

Purchase of equipment and leasehold improvements

(98,028)

(546,664)

Life insurance premiums paid

(95,887)

(103,891)

Proceeds from life insurance policy

2,014,184

Net cash provided by (used in) investing activities

1,820,269

(650,555)

Financing activities:

Proceeds from exercise of stock options

1,390,346

3,115,457

Net cash provided by financing activities

1,390,346

3,115,457

Net increase in cash and cash equivalents

2,537,720

2,029,543

Cash and cash equivalents at beginning of period

6,950,215

3,999,409

Cash and cash equivalents at end of period

$

9,487,935

$

6,028,952

 

 

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

5


KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

Nine Months Ended March 31, 2022

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

882,814

882,814

Stock-based compensation expense

382,010

382,010

Stock option exercises

539,089

2,695

1,387,651

1,390,346

Balance, March 31, 2022

9,147,795

$

45,739

$

12,571,779

$

9,612,753

$

22,230,271

Nine Months Ended March 31, 2021

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

161,651

161,651

Stock-based compensation expense

464,032

464,032

Stock option exercises

1,111,992

5,560

3,109,897

3,115,457

Balance, March 31, 2021

8,516,823

$

42,584

$

10,456,658

$

8,397,996

$

18,897,238

Three Months Ended March 31, 2022

Common Stock

Paid in

Retained

Shares

Amount

Capital

Earnings

Total

Balance, December 31, 2021

9,147,795

$

45,739

$

12,452,554

$

9,209,549

$

21,707,842

Net income

403,204

403,204

Stock-based compensation expense

119,225

119,225

Stock option exercises

Balance, March 31, 2022

9,147,795

$

45,739

$

12,571,779

$

9,612,753

$

22,230,271

 

Three Months Ended March 31, 2021

Common Stock

Paid in

Retained

Shares

Amount

Capital

Earnings

Total

Balance, December 31, 2020

7,447,489

$

37,237

$

7,281,190

$

8,872,164

$

16,190,591

Net (loss)

(474,168)

(474,168)

Stock-based compensation expense

154,275

154,275

Stock option exercises

1,069,334

5,347

3,021,193

3,026,540

Balance, March 31, 2021

8,516,823

$

42,584

$

10,456,658

$

8,397,996

$

18,897,238

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

 

 

6


KOSS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A)    BASIS OF PRESENTATION

 

The condensed consolidated balance sheets as of March 31, 2022 and June 30, 2021, the condensed consolidated statements of operations for the three and nine months ended March 31, 2022 and 2021, the condensed consolidated statements of cash flows for the nine months ended March 31, 2022 and 2021, and the condensed consolidated statements of stockholders' equity for the three and nine months ended March 31, 2022 and 2021, 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, stock-based compensation and deferred compensation. Actual results could differ from the Company's estimates.

  

B)    INCOME TAXES

 

A state tax provision of $3,575 and $5,638 was recorded for the three and nine months ended March 31, 2022.  For the three and nine months ended March 31, 2021, the state tax provision was $49 and $4,068, respectively. The federal income tax expense was zero for the three and nine months ended March 31, 2022 and 2021.

In the nine months ended March 31, 2022, 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 as of June 30, 2022, including the stock-based compensation expense deductions in the nine months ended March 31, 2022, is expected to be approximately $39,000,000. The adjustment to the estimated tax loss carryforward decreased the deferred tax asset to approximately $11,800,000 as of March 31, 2022, and the future realization of this is uncertain. The valuation allowance was also decreased to fully offset the deferred tax asset.

C) OTHER INCOME

In December 2021, the Company recognized approximately $262,000 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 statements of operations. 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 statements 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 were made under this arrangement until December 31, 2021 and were expensed as paid. The remaining deferred compensation liability of $2,284,909 and $2,168,599 recorded at March 31, 2022 and June 30, 2021, respectively, relates to a current officer’s plan. Deferred compensation expense of $20,000 and $116,310 was recognized under this arrangement in the three and nine months ended March 31, 2022.

 

 

2.    INVENTORIES

 

The components of inventories were as follows:

 

March 31, 2022

June 30, 2021

Raw materials

$

2,240,057

$

2,067,572

Finished goods

7,395,266

5,621,228

Inventories, gross

9,635,323

7,688,800

Reserve for obsolete inventory

(1,884,523)