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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 September 30, 2023

 

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 October 23, 2023, there were 9,234,795 shares outstanding of the registrant’s common stock. 

  


KOSS CORPORATION

FORM 10-Q

September 30, 2023

 

INDEX

 

 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

3

 

Item 1.

Financial Statements (Unaudited)

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2023 and June 30, 2023

3

 

 

Condensed Consolidated Statements of Operations for the Three months ended September 30, 2023 and 2022

4

 

 

Condensed Consolidated Statements of Cash Flows for the Three months ended September 30, 2023 and 2022

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three months ended September 30, 2023 and 2022

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

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

15

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

 

Item 4.

Controls and Procedures

20

PART II

OTHER INFORMATION

20

 

Item 1.

Legal Proceedings

20

Item 1A.

Risk Factors

20

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

 

Item 6.

Exhibits

22

 

2


PART I

FINANCIAL INFORMATION

Item 1.    Financial Statements

 

KOSS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

September 30, 2023

June 30, 2023

ASSETS

Current assets:

Cash and cash equivalents

$

1,984,279

$

3,091,062

Short term investments

17,183,653

17,064,274

Accounts receivable, less allowance for credit losses of $1,922 and $6,027, respectively

1,331,124

1,379,517

Inventories

5,778,872

6,423,441

Prepaid expenses and other current assets

462,663

284,622

Interest receivable

56,393

51,150

Income taxes receivable

127,363

86,901

Total current assets

26,924,347

28,380,967

Equipment and leasehold improvements, net

1,221,007

953,903

Other assets:

Operating lease right-of-use asset

2,942,900

3,015,887

Cash surrender value of life insurance

6,250,849

6,020,048

Total other assets

9,193,749

9,035,935

Total assets

$

37,339,103

$

38,370,805

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

228,545

$

267,513

Accrued liabilities

498,183

970,530

Deferred revenue

352,731

450,312

Operating lease liability

230,454

236,225

Income taxes payable

1,879

87,237

Total current liabilities

1,311,792

2,011,817

Long-term liabilities:

Deferred compensation

1,937,185

1,997,120

Deferred revenue

117,377

113,003

Operating lease liability

2,722,671

2,787,970

Total long-term liabilities

4,777,233

4,898,093

Total liabilities

6,089,025

6,909,910

Stockholders' equity:

Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 9,234,795

46,174

46,174

Paid in capital

13,160,785

13,113,993

Retained earnings

18,043,119

18,300,728

Total stockholders' equity

31,250,078

31,460,895

Total liabilities and stockholders' equity

$

37,339,103

$

38,370,805

 

 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

September 30

2023

2022

Net sales

$

3,373,938

$

3,364,129

Cost of goods sold

2,306,248

2,168,305

Gross profit

1,067,690

1,195,824

Selling, general and administrative expenses

1,536,279

23,680,196

(Loss) from operations

(468,589)

(22,484,372)

Other income

33,000,000

Interest income

212,859

27,056

(Loss) income before income tax provision

(255,730)

10,542,684

Income tax provision

1,879

597,941

Net (loss) income

$

(257,609)

$

9,944,743

(Loss) income per common share:

Basic

$

(0.03)

$

1.09

Diluted

$

(0.03)

$

1.01

Weighted-average number of shares:

Basic

9,234,795

9,157,284

Diluted

9,234,795

9,849,043

 

 

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

4


KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

Three Months Ended

September 30

2023

2022

Operating activities:

Net (loss) income

$

(257,609)

$

9,944,743

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

(Recovery of) Provision for credit losses

(4,105)

7,469

Depreciation of equipment and leasehold improvements

45,614

67,610

Accretion of discount on treasury securities

(120,305)

Noncash operating lease expense

1,917

2,556

Stock-based compensation expense

46,792

88,035

Change in cash surrender value of life insurance

(149,057)

(140,298)

(Benefit) Provision for deferred compensation

(59,935)

42,301

Net changes in operating assets and liabilities:

Accounts receivable

52,498

66,019

Inventories

644,569

732,866

Prepaid expenses and other current assets

(178,041)

(209,989)

Interest receivable

(5,243)

Income taxes receivable

(40,462)

Income taxes payable

(85,358)

597,941

Accounts payable

(38,968)

(274,746)

Accrued liabilities

(472,347)

954,343

Deferred revenue

(93,207)

(186,736)

Net cash (used in) provided by operating activities

(713,247)

11,692,114

Investing activities:

Purchase of equipment and leasehold improvements

(312,718)

(11,773)

Life insurance premiums paid

(81,744)

(87,994)

Proceeds from the maturity of treasury securities

2,000,000

Purchases of treasury securities

(1,999,074)

Net cash used in investing activities

(393,536)

(99,767)

Financing activities:

Proceeds from exercise of stock options

70,440

Net cash provided by financing activities

70,440

Net (decrease) increase in cash and cash equivalents

(1,106,783)

11,662,787

Cash and cash equivalents at beginning of period

3,091,062

9,208,170

Cash and cash equivalents at end of period

$

1,984,279

$

20,870,957

Supplemental cash flow information:

Cash paid for income taxes

$

127,700

$

 

 

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

5


KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

Three Months Ended September 30, 2023

Common Stock

Paid in

Retained

Shares

Amount

Capital

Earnings

Total

Balance, June 30, 2023

9,234,795

$

46,174

$

13,113,993

$

18,300,728

$

31,460,895

Net (loss)

(257,609)

(257,609)

Stock-based compensation expense

46,792

46,792

Balance, September 30, 2023

9,234,795

$

46,174

$

13,160,785

$

18,043,119

$

31,250,078

Three Months Ended September 30, 2022

Common Stock

Paid in

Retained

Shares

Amount

Capital

Earnings

Total

Balance, June 30, 2022

9,147,795

$

45,739

$

12,653,402

$

9,998,348

$

22,697,489

Net income

9,944,743

9,944,743

Stock-based compensation expense

88,035

88,035

Stock option exercises

32,000

160

70,280

70,440

Balance, September 30, 2022

9,179,795

$

45,899

$

12,811,717

$

19,943,091

$

32,800,707

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

 

 

6


KOSS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A)    BASIS OF PRESENTATION

 

The condensed consolidated balance sheets as of September 30, 2023 and June 30, 2023, the condensed consolidated statements of operations for the three months ended September 30, 2023 and 2022, the condensed consolidated statements of cash flows for the three months ended September 30, 2023 and 2022, and the condensed consolidated statements of stockholders' equity for the three months ended September 30, 2023 and 2022, 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 disclosures 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, 2023.

 

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 credit losses, 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)    INVESTMENTS

Debt securities are classified as held-to-maturity as the Company has the positive intent and ability to hold them to maturity. The securities are carried at amortized cost as current or noncurrent based upon maturity date and unrealized gains and losses are recognized when realized. The amortized cost of debt securities is adjusted for amortization of premium and accretion of discounts to maturity. Such amortization or accretion is included in interest income, along with other interest on cash and cash equivalents.

C)    INCOME TAXES

 

We estimate a provision for income taxes based on the effective tax rate expected to be applicable for the fiscal year. If the actual results are different from these estimates, adjustments to the effective tax rate may be required in the period such determination is made. Additionally, discrete items are treated separately from the effective rate analysis and are recorded separately as an income tax provision or benefit at the time they are recognized.

During the quarter ended September 30, 2023, a state income tax provision of $1,879 was recorded for the minimum tax payments expected given the taxable net loss for the quarter. No federal tax benefit or provision was recorded for the quarter. The Tax Cuts and Jobs Act (TCJA) changed the rules for deducting net operating losses (NOLs) beginning with the 2018 tax year. Before 2018, NOLs were fully deductible and could be carried back two years and carried forward 20 years. For NOLs arising in tax years beginning after December 31, 2017, the TCJA limits the NOL deduction to 80 percent of taxable income. As such, the utilization of the Company’s net operating loss carryforwards from fiscal years after 2018 were limited to 80 percent of the resulting taxable income. For the three months ended September 30, 2022, due to additional income generated by licensing fees, partially offset by related legal fees and expenses, taxable income resulted. The utilization of net operating loss carryforwards significantly reduced the taxable income, resulting in federal and state tax provisions of $449,103 and $148,838, respectively, for the three-month period ended September 30, 2022.


7


The effective tax rate was less than 1% for the three months ended September 30, 2023 and 5.7% for the three months ended September 30, 2022. 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 federal and state net operating loss carryforwards that existed as of June 30, 2023. The Company's taxable loss generated during the quarter ended September 30, 2023 increased the tax loss carryforward as of September 30, 2023 to approximately $32,100,000. Given the taxable loss for the current quarter, the expectation for utilization of the estimated tax loss carryforward is lessened, and as such, the future realization of this continues to be uncertain. The valuation allowance was adjusted to continue to fully offset the net deferred tax asset as there is sufficient negative evidence to support a full valuation allowance.

Temporary differences which give rise to deferred income tax assets and liabilities at September 30, 2023 and June 30, 2023 include:

September 30, 2023

June 30, 2023

Deferred income tax assets:

Deferred compensation

$

492,317

$

491,608

Stock-based compensation

77,530

117,607

Accrued expenses and reserves

517,015

571,719

Deferred revenue

115,721

138,665

Federal and state net operating loss carryforwards

8,288,733

8,216,671

IRC Section 174 research and development costs

113,521

63,855

Credit carryforwards

188,893

169,552

Equipment and leasehold improvements

116,709

136,294

Lease liability

684,671

744,431

Valuation allowance

(9,864,479)

(9,906,018)

Total deferred income tax assets

730,631

744,384

Deferred income tax liabilities:

ROU asset

(680,738)

(742,386)

Other

(49,893)

(1,998)

Net deferred income tax assets

$

-

$

-

D) LEGAL COSTS

All legal costs related to litigation for which the Company is liable, are charged to operations as incurred, except contingent legal fees as described below. Proceeds from the settlement of disputes are recorded in other income when the amounts are determinable, and collection is certain. Related license proceeds are considered functional and as such are recorded at a point in time, based on the underlying agreement. Related contingent legal fees and expenses are recorded in selling, general and administrative expense at that time. The contingent legal fee expenses could have a material effect on the results of operations, however, timing and impact is uncertain and is dependent on the resolution of related litigation.

E) OTHER INCOME

In the three months ending September 30, 2022, the Company received licensing proceeds of $33,000,000, which was recorded as other income. No other income was received in the three months ended September 30, 2023.

Other income is shown as a separate line on the condensed consolidated statements of operations.


8


F) DEFERRED COMPENSATION

The Company’s deferred compensation liability is for a current officer and is calculated based on years of service and compensation, along with various assumptions related to 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 deferred compensation liability recorded at September 30, 2023 and June 30, 2023 is $1,937,185 and $1,997,120, respectively. The decrease in the deferred compensation liability for the current officer during the three months ended September 30, 2023 resulted in compensation income under this arrangement of $59,935. Deferred compensation expense of $42,301 was recognized in the three months ended September 30, 2022.

G) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Effective July 1, 2023, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including trade receivables and held-to-maturity debt securities. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets, including accounts receivable.

The Company adopted ASU 2016-13 effective July 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost.

Allowance for Credit Losses – Accounts Receivable: The allowance for credit losses is deducted from the cost basis of the receivable to present the net amount expected to be collected on the accounts. The Company measures expected credit losses for accounts receivable using the aging method whereby expected credit losses are determined on the basis of how long a receivable has been outstanding. Historical loss data is utilized to estimate expected losses as the risk characteristics of the customer base and the Company’s credit practices have not changed significantly over time. The estimates are then adjusted for current conditions, such as level of inflation and the potential change in credit availability given rising interest rates, as well as supportable and reasonable forecasts indicating whether these conditions will continue into the future or new ones will arise that need to be considered.

Upon evaluation of the impact of this ASU, the Company concluded that minimal reserves were necessary as historical losses were immaterial, and, based on the qualitative and quantitative analysis performed in accordance with Topic 326 requirements, the Company determined there was no reasonable expectation of significant credit losses associated with the Company’s accounts receivable in the foreseeable future.

Allowance for Credit Losses - Held-to Maturity Debt Securities: The Company did not record an allowance for credit losses on held-to-maturity U.S. Treasury securities of $17,183,653 as these securities have the following characteristics that support a zero loss expectation: they are explicitly guaranteed by the U.S. government, are consistently highly rated by major rating agencies and have a long history of no credit losses.

The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements. Results for reporting periods beginning after July 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not, or are not expected by management to have a material impact on the Company’s present or future consolidated financial statements.


9


2.    INVESTMENTS

The following tables summarize the unrealized positions for the held-to-maturity debt securities as of September 30, 2023 and June 30, 2023:

September 30, 2023

Amortized cost basis

Gross unrealized gains

Gross unrealized losses

Fair Value

US Treasury securities

$

17,183,653

$

$

(65,219)

$

17,118,434

Total

$

17,183,653

$

$

(65,219)

$

17,118,434

June 30, 2023

Amortized cost basis

Gross unrealized gains

Gross unrealized losses

Fair Value

US Treasury securities

$

17,064,274

$

$

(93,740)

$

16,970,534

Total

$

17,064,274

$

$

(93,740)

$

16,970,534

The following tables summarize the fair value and amortized cost basis of the held-to-maturity debt securities by contractual maturity as of September 30, 2023 and June 30, 2023:

September 30, 2023

Amortized Cost Basis

Fair value

Due within one year

$

17,183,653

$

17,118,434

Total

$

17,183,653

$

17,118,434

June 30, 2023

Amortized Cost Basis

Fair value

Due within one year

$

17,064,274

$

16,970,534

Total

$

17,064,274

$

16,970,534

3.    INVENTORIES

 

The components of inventories were as follows:

 

September 30, 2023

June 30, 2023

Raw materials

$

2,077,546

$

2,071,360

Finished goods

5,558,559

6,178,186

Inventories, gross

7,636,105

8,249,546

Reserve for obsolete inventory

(1,857,233)

(1,826,105)

Inventories, net

$

5,778,872

$

6,423,441

4.    CREDIT FACILITY

 

On May 14, 2019, the Company entered into a secured credit facility (“Credit Agreement”) with Town Bank (“Lender”). The Credit Agreement provides for a $5,000,000 revolving secured credit facility 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%. A Third Amendment to the Credit Agreement effective October 30, 2022 extends the maturity date to October 31, 2024. 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 C