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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended March 31, 2022

☐ 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.

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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

‎

Table of Contents

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.
‎

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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.
‎

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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.
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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.

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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.

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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)