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, 2019
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) 964-5000Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common | KOSS | NASDAQ |
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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
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 | |
(Do not check if a 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
At May 6, 2019,4, 2020, there were 7,404,831 shares outstanding of the registrant’s common stock.
FORM 10-Q
INDEX
Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||
March 31, 2020 | June 30, 2019* | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,063,963 | $ | 2,228,282 | ||||
Accounts receivable, less allowance for doubtful accounts of $8,758 and $2,617, respectively | 3,553,376 | 3,655,143 | ||||||
Inventories, net | 4,991,561 | 6,851,448 | ||||||
Prepaid expenses and other current assets | 388,501 | 133,889 | ||||||
Income taxes receivable | 10,234 | 45,660 | ||||||
Total current assets | 11,007,635 | 12,914,422 | ||||||
Equipment and leasehold improvements, net | 1,022,860 | 890,110 | ||||||
Other assets: | ||||||||
| Deferred income taxes | - | 13,276 | ||||||
Operating lease right-of-use assets | 2,649,823 | 2,847,846 | ||||||
Cash surrender value of life insurance | 6,838,982 | 6,569,628 | ||||||
Total other assets | 9,488,805 | 9,430,750 | ||||||
Total assets | $ | 21,519,300 | $ | 23,235,282 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 409,081 | $ | 1,436,373 | ||||
Accrued liabilities | 634,897 | 650,513 | ||||||
Deferred revenue | 439,302 | 645,470 | ||||||
Operating lease liability | 274,025 | 265,443 | ||||||
Total current liabilities | 1,757,305 | 2,997,799 | ||||||
Long-term liabilities: | ||||||||
Deferred compensation | 2,344,478 | 2,419,962 | ||||||
Deferred revenue | 165,226 | 163,018 | ||||||
Operating lease liability | 2,375,797 | 2,582,402 | ||||||
Total long-term liabilities | 4,885,501 | 5,165,382 | ||||||
Total liabilities | 6,642,806 | 8,163,181 | ||||||
Stockholders' equity: | ||||||||
Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 7,404,831 | 37,024 | 37,024 | ||||||
Paid in capital | 6,761,363 | 6,333,135 | ||||||
Retained earnings | 8,078,107 | 8,701,942 | ||||||
Total stockholders' equity | 14,876,494 | 15,072,101 | ||||||
Total liabilities and stockholders' equity | $ | 21,519,300 | $ | 23,235,282 | ||||
| (Unaudited) | ||||||||
| March 31, 2019 | June 30, 2018* | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,722,895 | $ | 1,081,533 | ||||
| Accounts receivable, less allowance for doubtful accounts of $3,235 and $51,854, respectively | 2,812,147 | 4,709,745 | ||||||
| Inventories, net | 6,729,666 | 6,138,679 | ||||||
| Prepaid expenses and other current assets | 275,315 | 206,776 | ||||||
| Income taxes receivable | 42,151 | 32,375 | ||||||
| Total current assets | 12,582,174 | 12,169,108 | ||||||
| Equipment and leasehold improvements, net | 913,806 | 1,132,105 | ||||||
| Other assets: | ||||||||
| Deferred income taxes | 13,277 | — | ||||||
| Operating lease right-of-use asset | 2,912,466 | 3,102,263 | ||||||
| Cash surrender value of life insurance | 6,532,249 | 6,374,372 | ||||||
| Total other assets | 9,457,992 | 9,476,635 | ||||||
| Total assets | $ | 22,953,972 | $ | 22,777,848 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,207,199 | $ | 1,429,491 | ||||
| Accrued liabilities | 741,126 | 788,961 | ||||||
| Deferred revenue | 606,466 | 690,905 | ||||||
| Operating lease liability | 262,643 | 254,418 | ||||||
| Total current liabilities | 2,817,434 | 3,163,775 | ||||||
| Long-term liabilities: | ||||||||
| Deferred compensation | 2,413,474 | 2,394,009 | ||||||
| Deferred revenue | 156,786 | 168,465 | ||||||
| Operating lease liability | 2,649,823 | 2,847,845 | ||||||
| Total long-term liabilities | 5,220,083 | 5,410,319 | ||||||
| Total liabilities | 8,037,517 | 8,574,094 | ||||||
| Stockholders' equity: | ||||||||
| Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 7,404,831 and 7,382,706 shares, respectively | 37,024 | 36,914 | ||||||
| Paid in capital | 6,091,023 | 5,752,270 | ||||||
| Retained earnings | 8,788,408 | 8,414,570 | ||||||
| Total stockholders' equity | 14,916,455 | 14,203,754 | ||||||
| Total liabilities and stockholders' equity | $ | 22,953,972 | $ | 22,777,848 | ||||
*As adjusted for the retrospective adoption of ASC 606
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2020 | 2019* | 2020 | 2019* | |||||||||||||
Net sales | $ | 4,789,441 | $ | 4,860,247 | $ | 14,362,862 | $ | 16,056,313 | ||||||||
Cost of goods sold | 3,199,665 | 3,205,039 | 10,061,544 | 10,907,425 | ||||||||||||
Gross profit | 1,589,776 | 1,655,208 | 4,301,318 | 5,148,888 | ||||||||||||
Selling, general and administrative expenses | 1,687,676 | 1,540,348 | 4,938,983 | 4,889,284 | ||||||||||||
(Loss) income from operations | (97,900 | ) | 114,860 | (637,665 | ) | 259,604 | ||||||||||
Interest income | 6,631 | - | 19,955 | - | ||||||||||||
(Loss) income before income tax provision | (91,269 | ) | 114,860 | (617,710 | ) | 259,604 | ||||||||||
| Income tax provision | 6,104 | (23,020 | ) | 6,125 | (22,995 | ) | ||||||||||
Net (loss) income | $ | (97,373 | ) | $ | 137,880 | $ | (623,835 | ) | $ | 282,599 | ||||||
(Loss) income per common share: | ||||||||||||||||
Basic | $ | (0.01 | ) | $ | 0.02 | $ | (0.08 | ) | $ | 0.04 | ||||||
Diluted | $ | (0.01 | ) | $ | 0.02 | $ | (0.08 | ) | $ | 0.04 | ||||||
Weighted-average number of shares: | ||||||||||||||||
Basic | 7,404,831 | 7,404,831 | 7,404,831 | 7,399,768 | ||||||||||||
Diluted | 7,404,831 | 7,405,425 | 7,404,831 | 7,408,110 | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31 | March 31 | |||||||||||||||
| 2019 | 2018* | 2019 | 2018* | |||||||||||||
| Net sales | $ | 4,860,247 | $ | 4,390,454 | $ | 16,056,313 | $ | 16,365,370 | ||||||||
| Cost of goods sold | 3,205,039 | 3,377,035 | 10,907,425 | 11,791,297 | ||||||||||||
| Gross profit | 1,655,208 | 1,013,419 | 5,148,888 | 4,574,073 | ||||||||||||
| Selling, general and administrative expenses | 1,505,922 | 1,771,295 | 4,798,045 | 5,203,125 | ||||||||||||
| Interest expense | — | — | — | 5,218 | ||||||||||||
| Income (loss) before income tax provision | 149,286 | (757,876 | ) | 350,843 | (634,270 | ) | ||||||||||
| Income tax provision | (23,020 | ) | 4,274 | (22,995 | ) | 3,047,356 | ||||||||||
| Net income (loss) | $ | 172,306 | $ | (762,150 | ) | $ | 373,838 | $ | (3,681,626 | ) | ||||||
| Income (loss) per common share: | ||||||||||||||||
| Basic | $ | 0.02 | $ | (0.10 | ) | $ | 0.05 | $ | (0.50 | ) | ||||||
| Diluted | $ | 0.02 | $ | (0.10 | ) | $ | 0.05 | $ | (0.50 | ) | ||||||
| Weighted-average number of shares | ||||||||||||||||
| Basic | 7,404,831 | 7,382,706 | 7,399,768 | 7,382,706 | ||||||||||||
| Diluted | 7,405,425 | 7,382,706 | 7,408,110 | 7,382,706 | ||||||||||||
*As adjusted for the retrospective adoption of ASC 606
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended | ||||||||
March 31 | ||||||||
2020 | 2019* | |||||||
Operating activities: | ||||||||
Net (loss) income | $ | (623,835 | ) | $ | 282,599 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
(Recovery of) provision for doubtful accounts | (8,938 | ) | 4,039 | |||||
Depreciation of equipment and leasehold improvements | 258,401 | 336,946 | ||||||
Stock-based compensation expense | 428,228 | 383,425 | ||||||
Deferred income taxes | 13,276 | (13,277 | ) | |||||
Change in cash surrender value of life insurance | (156,398 | ) | (34,801 | ) | ||||
Change in deferred compensation accrual | 37,016 | 131,965 | ||||||
Deferred compensation paid | (112,500 | ) | (112,500 | ) | ||||
| Net changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 110,705 | 1,893,559 | ||||||
| Inventories | 1,859,887 | (590,987 | ) | |||||
| Prepaid expenses and other current assets | (254,612 | ) | (68,539 | ) | ||||
| Income taxes receivable | 35,426 | (9,776 | ) | |||||
| Accounts payable | (1,027,292 | ) | (222,292 | ) | ||||
| Accrued liabilities | (15,616 | ) | (47,835 | ) | ||||
Deferred revenue | (203,960 | ) | (96,118 | ) | ||||
Net cash provided by operating activities | 339,788 | 1,836,408 | ||||||
Investing activities: | ||||||||
Purchase of equipment and leasehold improvements | (391,151 | ) | (118,647 | ) | ||||
Life insurance premiums paid | (112,956 | ) | (123,076 | ) | ||||
Net cash (used in) investing activities | (504,107 | ) | (241,723 | ) | ||||
Financing activities: | ||||||||
Proceeds from exercise of stock options | - | 46,677 | ||||||
Net cash provided by financing activities | - | 46,677 | ||||||
Net (decrease) increase in cash and cash equivalents | (164,319 | ) | 1,641,362 | |||||
Cash and cash equivalents at beginning of period | 2,228,282 | 1,081,533 | ||||||
Cash and cash equivalents at end of period | $ | 2,063,963 | $ | 2,722,895 | ||||
| Nine Months Ended | ||||||||
| March 31 | ||||||||
| 2019 | 2018* | |||||||
| Operating activities: | ||||||||
| Net income (loss) | $ | 373,838 | $ | (3,681,626 | ) | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Provision for (recovery of) doubtful accounts | 4,039 | 2,626 | ||||||
| Loss on disposal of equipment and leasehold improvements | — | 343 | ||||||
| Depreciation of equipment and leasehold improvements | 336,946 | 385,221 | ||||||
| Stock-based compensation expense | 292,186 | 248,624 | ||||||
| Deferred income taxes | (13,277 | ) | 3,041,405 | |||||
| Change in cash surrender value of life insurance | (34,801 | ) | (181,403 | ) | ||||
| Change in deferred revenue | (96,118 | ) | (109,158 | ) | ||||
| Change in deferred compensation accrual | 131,965 | 137,718 | ||||||
| Deferred compensation paid | (112,500 | ) | (112,500 | ) | ||||
| Net changes in operating assets and liabilities (see note 9) | 954,130 | 1,788,052 | ||||||
| Cash provided by operating activities | 1,836,408 | 1,519,302 | ||||||
| Investing activities: | ||||||||
| Purchase of equipment and leasehold improvements | (118,647 | ) | (250,618 | ) | ||||
| Life insurance premiums paid | (123,076 | ) | (131,058 | ) | ||||
| Cash used in investing activities | (241,723 | ) | (381,676 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from exercise of stock options | 46,677 | — | ||||||
| Cash provided by financing activities | 46,677 | — | ||||||
| Net increase in cash and cash equivalents | 1,641,362 | 1,137,626 | ||||||
| Cash and cash equivalents at beginning of period | 1,081,533 | 432,283 | ||||||
| Cash and cash equivalents at end of period | $ | 2,722,895 | $ | 1,569,909 | ||||
*As adjusted for the retrospective adoption of ASC 606
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
Nine Months Ended March 31, 2020 | ||||||||||||||||||||
Common Stock | Paid in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance, June 30, 2019, as previously reported | 7,404,831 | $ | 37,024 | $ | 6,186,393 | $ | 8,848,684 | $ | 15,072,101 | |||||||||||
| Retrospective change in accounting principle (see Note 2) | - | - | 146,742 | (146,742 | ) | - | ||||||||||||||
| Adjusted Balance, June 30, 2019 | 7,404,831 | $ | 37,024 | $ | 6,333,135 | $ | 8,701,942 | $ | 15,072,101 | |||||||||||
Net (loss) | - | - | - | (623,835 | ) | (623,835 | ) | |||||||||||||
Stock-based compensation expense | - | - | 428,228 | - | 428,228 | |||||||||||||||
Balance, March 31, 2020 | 7,404,831 | $ | 37,024 | $ | 6,761,363 | $ | 8,078,107 | $ | 14,876,494 | |||||||||||
Nine Months Ended March 31, 2019 | ||||||||||||||||||||
Common Stock | Paid in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance, June 30, 2018, as previously reported | 7,382,706 | $ | 36,914 | $ | 5,752,270 | $ | 8,414,570 | $ | 14,203,754 | |||||||||||
| Retrospective change in accounting principle (see Note 2) | - | - | 18,617 | (18,617 | ) | - | ||||||||||||||
| Adjusted Balance, June 30, 2018 | 7,382,706 | $ | 36,914 | $ | 5,770,887 | $ | 8,395,953 | $ | 14,203,754 | |||||||||||
Net income, as restated | - | - | - | 282,599 | 282,599 | |||||||||||||||
Stock-based compensation expense, as restated | - | - | 383,425 | - | 383,425 | |||||||||||||||
| Exercise of common stock options | 22,125 | 110 | 46,567 | - | 46,677 | |||||||||||||||
Balance, March 31, 2019 | 7,404,831 | $ | 37,024 | $ | 6,200,879 | $ | 8,678,552 | $ | 14,916,455 | |||||||||||
Three Months Ended March 31, 2020 | ||||||||||||||||||||
Common Stock | Paid in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
| Balance, December 31, 2019 | 7,404,831 | $ | 37,024 | $ | 6,618,029 | $ | 8,175,480 | $ | 14,830,533 | |||||||||||
| Net (loss) | - | - | - | (97,373 | ) | (97,373 | ) | |||||||||||||
| Stock-based compensation expense | - | - | 143,334 | - | 143,334 | |||||||||||||||
Balance, March 31, 2020 | 7,404,831 | $ | 37,024 | $ | 6,761,363 | $ | 8,078,107 | $ | 14,876,494 | |||||||||||
Three Months Ended March 31, 2019 | ||||||||||||||||||||
Common Stock | Paid in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
| Balance, December 31, 2018, as restated | 7,404,831 | $ | 37,024 | $ | 6,068,623 | $ | 8,540,672 | $ | 14,646,319 | |||||||||||
| Net income, as restated | 137,880 | 137,880 | ||||||||||||||||||
| Stock-based compensation expense, as restated | 132,256 | 132,256 | ||||||||||||||||||
Balance, March 31, 2019 | 7,404,831 | $ | 37,024 | $ | 6,200,879 | $ | 8,678,552 | $ | 14,916,455 | |||||||||||
| Nine Months Ended March 31, 2019 | |||||||||||||||||||
| Common Stock | Paid in | Retained | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Total | |||||||||||||||
| Balance, June 30, 2018* | 7,382,706 | $ | 36,914 | $ | 5,752,270 | $ | 8,414,570 | $ | 14,203,754 | ||||||||||
| Net income | — | — | — | 373,838 | 373,838 | ||||||||||||||
| Stock-based compensation expense | — | — | 292,186 | — | 292,186 | ||||||||||||||
| Exercise of common stock options | 22,125 | 110 | 46,567 | — | 46,677 | ||||||||||||||
| Balance, March 31, 2019 | 7,404,831 | $ | 37,024 | $ | 6,091,023 | $ | 8,788,408 | $ | 14,916,455 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| Three Months Ended March 31, 2019 | |||||||||||||||||||
| Common Stock | Paid in | Retained | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Total | |||||||||||||||
| Balance, December 31, 2018 | 7,404,831 | $ | 37,024 | $ | 5,993,193 | $ | 8,616,102 | $ | 14,646,319 | ||||||||||
| Net income | — | — | — | 172,306 | 172,306 | ||||||||||||||
| Stock-based compensation expense | — | — | 97,830 | — | 97,830 | ||||||||||||||
| Balance, March 31, 2019 | 7,404,831 | $ | 37,024 | $ | 6,091,023 | $ | 8,788,408 | $ | 14,916,455 | ||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The condensed consolidated balance sheet of Koss Corporation (the "Company") as of June 30, 2018, has been derived from audited financial statements. The unauditedMarch 31, 2020, the condensed consolidated financial statements presented herein are based on interim amounts. Certain informationof operations for the three and footnote disclosures normally included in financialnine months ended March 31, 2020, the condensed consolidated statements of cash flows for the nine months ended March 31, 2020 and the condensed consolidated statements of stockholders' equity for the three and nine months ended March 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 condensed or omitted.audited. In the opinion of management, all adjustments (consisting of normal recurring accruals)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 the nine months ended March 31, 2019,any interim period are not necessarily indicative of the operating results that may be experienced for the full fiscal year ending June 30, 2019.
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, 2018.
The Company has restated certain prior period amounts related to revenue and leases to conform to the current period presentation based on its adoptionpreparation of the new accounting standards for those items.
B) INCOME TAXES
A state tax provision of $6,104 and liabilities are valued at$6,125 was recorded during the present value of the future lease payment obligations.
| New | ||||||||||||
| As | Revenue | |||||||||||
| Balance Sheets | Previously | Standard | As | |||||||||
| June 30, 2018 | Reported | Adjustment | Adjusted | |||||||||
| Current liabilities: | ||||||||||||
| Accrued liabilities | $ | 1,178,571 | $ | (389,610 | ) | $ | 788,961 | |||||
| Deferred revenue | — | 690,905 | 690,905 | |||||||||
| Long-term liabilities: | ||||||||||||
| Other liabilities | 155,702 | (155,702 | ) | — | ||||||||
| Deferred revenue | — | 168,465 | 168,465 | |||||||||
| Equity: | ||||||||||||
| Retained earnings | 8,728,628 | (314,058 | ) | 8,414,570 | ||||||||
| New | ||||||||||||
| As | Revenue | |||||||||||
| Statements of Income | Previously | Standard | As | |||||||||
| Three Months Ended March 31, 2018 | Reported | Adjustment | Adjusted | |||||||||
| Net sales | $ | 4,326,674 | $ | 63,780 | $ | 4,390,454 | ||||||
| Cost of goods sold | 3,363,121 | 13,914 | 3,377,035 | |||||||||
| Income tax provision | 5,126 | (852 | ) | 4,274 | ||||||||
| Net (loss) | (812,868 | ) | 50,718 | (762,150 | ) | |||||||
| (Loss) per common share: | ||||||||||||
| Basic | $ | (0.11 | ) | $ | 0.01 | $ | (0.10 | ) | ||||
| Diluted | (0.11 | ) | 0.01 | (0.10 | ) | |||||||
| New | ||||||||||||
| As | Revenue | |||||||||||
| Statements of Income | Previously | Standard | As | |||||||||
| Nine Months Ended March 31, 2018 | Reported | Adjustment | Adjusted | |||||||||
| Net sales | $ | 16,277,181 | $ | 88,189 | $ | 16,365,370 | ||||||
| Cost of goods sold | 11,753,719 | 37,578 | 11,791,297 | |||||||||
| Income tax provision | 3,048,208 | (852 | ) | 3,047,356 | ||||||||
| Net (loss) | (3,733,089 | ) | 51,463 | (3,681,626 | ) | |||||||
| (Loss) per common share: | ||||||||||||
| Basic | $ | (0.51 | ) | $ | 0.01 | $ | (0.50 | ) | ||||
| Diluted | (0.51 | ) | 0.01 | (0.50 | ) | |||||||
| Balance Sheets | As | |||
| June 30, 2018 | Adjusted | |||
| Assets: | ||||
| Operating lease right-of-use asset | $ | 3,102,263 | ||
| Current liabilities: | ||||
| Operating lease liability | 254,418 | |||
| Long-term liabilities: | ||||
| Operating lease liability | 2,847,845 | |||
| March 31, 2019 | June 30, 2018* | |||||||
| Raw materials | $ | 2,676,550 | $ | 2,717,862 | ||||
| Finished goods | 6,463,112 | 6,057,703 | ||||||
| 9,139,662 | 8,775,565 | |||||||
| Allowance for obsolete inventory | (2,409,996 | ) | (2,636,886 | ) | ||||
| Inventories, net | $ | 6,729,666 | $ | 6,138,679 | ||||
C) PATENT COSTS
The Company incurs on-going legal fees and filing costs related to income taxthe patent portfolio. These costs are expensed in the period they are incurred since no patent legal costs were probable to provide a future economic benefit.
2. CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter of fiscal 2020, the Company changed its method of recording stock-based compensation expense. Under the new accounting principle, stock-based compensation expense is recorded on a straight-line basis over the vesting period and forfeitures are recognized when they occur. Under the previous method, the Company estimated future forfeitures and the expected number of $4,274awards that would vest and $3,047,356subsequently adjusted for forfeitures. The Company believes this method of recording stock-based compensation expense on a straight-line basis over the vesting period is preferable since it is more reflective of the stock options that will actually vest.
The cumulative effect of the changes in the June 30, 2019 Consolidated Balance Sheet for the change in principle related to stock-based compensation expense using the full retrospective method was as follows:
Stock-Based | ||||||||||||
Balance Sheet | As Previously | Compensation | As | |||||||||
June 30, 2019 | Reported | Adjustment | Adjusted | |||||||||
Equity: | ||||||||||||
Paid in capital | $ | 6,186,393 | $ | 146,742 | $ | 6,333,135 | ||||||
Retained earnings | $ | 8,848,684 | $ | (146,742 | ) | $ | 8,701,942 | |||||
The impact of the change in principle on the Consolidated Statement of Operations for the three and nine months ended March 31, 2018. There2019 was no tax expenseas follows:
Stock-Based | ||||||||||||
Statement of Operations | As Previously | Compensation | As | |||||||||
Three Months Ended March 31, 2019 | Reported | Adjustment | Adjusted | |||||||||
Selling, general and administrative expenses | $ | 1,505,922 | $ | 34,426 | $ | 1,540,348 | ||||||
Income from operations | 149,286 | (34,426 | ) | 114,860 | ||||||||
Net income | $ | 172,306 | $ | (34,426 | ) | $ | 137,880 | |||||
Income per common share | ||||||||||||
Basic | $ | 0.02 | $ | (0.00 | ) | $ | 0.02 | |||||
Diluted | $ | 0.02 | $ | (0.00 | ) | $ | 0.02 | |||||
Stock-Based | ||||||||||||
Statement of Operations | As Previously | Compensation | As | |||||||||
Nine Months Ended March 31, 2019 | Reported | Adjustment | Adjusted | |||||||||
Selling, general and administrative expenses | $ | 4,798,045 | $ | 91,239 | $ | 4,889,284 | ||||||
Income from operations | 350,843 | (91,239 | ) | 259,604 | ||||||||
Net income | $ | 373,838 | $ | (91,239 | ) | $ | 282,599 | |||||
Income per common share | ||||||||||||
Basic | $ | 0.05 | $ | (0.01 | ) | $ | 0.04 | |||||
Diluted | $ | 0.05 | $ | (0.01 | ) | $ | 0.04 | |||||
The impact of the change in principle on the threeConsolidated Statement of Cash Flows for the nine months ended March 31, 2019 related to the federal statutory tax rate was as follows:
Stock-Based | ||||||||||||
Statement of Cash Flows | As Previously | Compensation | As | |||||||||
Nine Months Ended March 31, 2019 | Reported | Adjustment | Adjusted | |||||||||
Operating activities: | ||||||||||||
Net income | $ | 373,838 | $ | (91,239 | ) | $ | 282,599 | |||||
Stock-based compensation expense | $ | 292,186 | $ | 91,239 | $ | 383,425 | ||||||
As of 21% due to tax net operating loss carryforwards being utilized. The income tax expense for the nine months ended March 31, 2018 includes $713,826 for2020, the write downunrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of deferred income taxes due to the change in federal statutory rate as a result of the passage of the Tax Act and $2,429,235 related to the recording of a valuation allowance for all deferred taxes.3.03 years, was $1,366,897. The valuation allowanceunrecognized stock-based compensation expense was recorded due to uncertainty of the ability to realize the deferred tax assets.
3. INVENTORIES
The components of inventories were as follows:
March 31, 2020 | June 30, 2019 | |||||||
Raw materials | $ | 1,915,307 | $ | 1,848,340 | ||||
Finished goods | 4,622,349 | 6,604,408 | ||||||
| Inventories, gross | 6,537,656 | 8,452,748 | ||||||
Reserve for obsolete inventory | (1,546,095 | ) | (1,601,300 | ) | ||||
Inventories, net | $ | 4,991,561 | $ | 6,851,448 | ||||
4. CREDIT FACILITY
On May 12, 2010,14, 2019, the Company entered into a secured credit facility (“("Credit Agreement”Agreement") with JPMorgan ChaseTown Bank N.A. (“Lender”). for a two-year term expiring on May 14, 2021. The Credit Agreement providedprovides for an $8,000,000a $5,000,000 revolving secured credit facility with interest rates either ranging from 0.0% to 0.75%of 1.50% over the Lender’s most recently publicly announced prime rate or 2.0% to 3.0% over LIBOR, depending on the Company’s leverage ratio.LIBOR. The Company pays a fee of 0.3% to 0.45% for unused amounts committed in the credit facility. On June 29, 2017, the Credit Agreement was amended to reduce the facility to $4,000,000 and to eliminate the financial covenants. On May 9, 2018, the Credit Agreement was amended to extend the expiration to July 31, 2019. In addition to the revolving loans, the Credit Agreement also provides that the Company may, from time to time, request the Lender to issuefor letters of credit for the benefit of the Company of up to a sublimit of $2,000,000 and subject to certain other limitations. The loan may be used only for general corporate purposes of$1,000,000. There are no unused line fees in the Company.credit facility. The Company and the Lender also entered into the Pledge anda General Business Security Agreement dated May 12, 2010,14, 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 March 31, 20192020, and June 30, 2018,2019, there were no outstanding borrowings on the facility.
5. REVENUE RECOGNITION
The Company incurs interest expense primarily related to its secured credit facility. Interest expense was $0disaggregates it's net sales by geographical location as it believes it best depicts how the nature, timing and $5,218 for the threeuncertainty of net sales and nine months ended March 31, 2018, respectively. There was no interest expense in the three and nine months ended March 31, 2019.
| March 31, 2019 | June 30, 2018* | |||||||
| Cooperative advertising and promotion allowances | $ | 190,923 | $ | 292,873 | ||||
| Customer credit balances | 126,663 | 53,365 | ||||||
| Current deferred compensation | 150,000 | 150,000 | ||||||
| Employee benefits | 59,708 | 60,739 | ||||||
| Legal and professional fees | 90,300 | 81,000 | ||||||
| Profit-sharing | 21,578 | 17,975 | ||||||
| Sales commissions and bonuses | 64,342 | 74,078 | ||||||
| Other | 37,612 | 58,931 | ||||||
| Total accrued liabilities | $ | 741,126 | $ | 788,961 | ||||
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
United States | $ | 4,200,797 | $ | 3,611,654 | $ | 11,785,603 | $ | 10,653,071 | ||||||||
Export | 588,644 | 1,248,593 | 2,577,259 | 5,403,242 | ||||||||||||
Net Sales | $ | 4,789,441 | $ | 4,860,247 | $ | 14,362,862 | $ | 16,056,313 | ||||||||
| Nine Months Ended | ||||||||
| March 31 | ||||||||
| 2019 | 2018* | |||||||
| Accounts receivable | $ | 1,893,559 | $ | 919,927 | ||||
| Inventories | (590,987 | ) | 1,988,887 | |||||
| Prepaid expenses and other current assets | (68,539 | ) | (123,671 | ) | ||||
| Income taxes receivable | (9,776 | ) | 5,951 | |||||
| Accounts payable | (222,292 | ) | (1,414,569 | ) | ||||
| Accrued liabilities | (47,835 | ) | 411,527 | |||||
| Net change | $ | 954,130 | $ | 1,788,052 | ||||
| Net cash paid during the period for: | ||||||||
| Income taxes | $ | 1,678 | $ | 3,182 | ||||
| Interest | $ | — | $ | 5,218 | ||||
Deferred revenue relates primarily to consumer and customer warranties. These constitute future performance obligations and the Company defers revenue related to recognize these future performance obligations. ChangesThe Company recognized revenue, which was included in unearnedthe deferred revenue wereliability at the beginning of the periods, of $367,198 and $424,574in the nine months ended March 31, 2020 and 2019, respectively, for performance obligations related to consumer and customer warranties. The deferred revenue liability was $859,370 and $763,252 as follows:
| Beginning Balance | Deferral of Revenue | Recognition of Deferred Revenue | Ending Balance | |||||||||||||
| Nine Months Ended March 31, 2019 | $ | 859,370 | $ | 368,087 | $ | (464,205 | ) | $ | 763,252 | |||||||
6. (LOSS) INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE
Basic (loss) income per share is computed based on the weighted-average number of common shares outstanding. Diluted income 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 per share:
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2020 | 2019* | 2020 | 2019* | |||||||||||||
Numerator | ||||||||||||||||
Net (loss) income | $ | (97,373 | ) | $ | 137,880 | $ | (623,835 | ) | $ | 282,599 | ||||||
Denominator | ||||||||||||||||
Weighted average shares, basic | 7,404,831 | 7,404,831 | 7,404,831 | 7,399,768 | ||||||||||||
Dilutive effect of stock compensation awards | - | 594 | - | 8,342 | ||||||||||||
Diluted shares | 7,404,831 | 7,405,425 | 7,404,831 | 7,408,110 | ||||||||||||
Net (loss) income attributable to common shareholders per share: | ||||||||||||||||
Basic | $ | (0.01 | ) | $ | 0.02 | $ | (0.08 | ) | $ | 0.04 | ||||||
Diluted | $ | (0.01 | ) | $ | 0.02 | $ | (0.08 | ) | $ | 0.04 | ||||||
*As adjusted for change in accounting principle (Note 2)
7. 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$380,000 per year and included an option to renew at the same rate for an additional five years ending June 30, 2028.2028. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership.
8. SUBSEQUENT EVENTS
On April 13, 2020, the Company entered into an unsecured loan ("SBA Loan") under the Small Business Administration ("SBA") Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") through Town Bank (“Lender”). The SBA Loan funds that were disbursed on April 14, 2020, have a two-year term expiring on April 14, 2022. The SBA Loan has a principal amount of $506,700 with an interest rate of 1.0%. The Company used its incremental borrowing rate as of July 1, 2017, the retrospective date of adoption of ASU 2016-02 (Topic 842) Leases, to calculate the net present valuemay apply for forgiveness of the operating lease ROU assetamount due under this SBA Loan in an amount equal to the sum of the following costs incurred by the Company during the eight week period following the disbursement of funds under the SBA Loan: (1) payroll costs; (2) any payment of a covered rent obligation and liability.(3) any covered utility payment. The five year renewal option was includedamount of the loan forgiveness will be calculated (and may be reduced) in accordance with the requirements of the Paycheck Protection Program, including the provisions of Section 1106 of the CARES Act. Not more than 25% of the amount forgiven can be attributable to non-payroll costs.
On April 24, 2020, the Company formed a wholly owned subsidiary, Koss Corp BV, in The Netherlands. The Company formed Koss Corp BV to comply with certain European Union requirements. The new entity is non-operating and holds no assets.
9. SUPPLIER CONCENTRATION
The Company uses contract manufacturing facilities in the calculationPeople’s Republic of China. The majority of the ROU asset and liability as the Company believes itcontract manufacturing is more likely than not to exercise its right to renew. The non-lease componentsdone by four vendors with one vendor representing approximately 75% of the agreement related to common area maintenance charges are accounted for separately.
| Nine Months Ended | ||||||||
| March 31 | ||||||||
| 2019 | 2018 | |||||||
| Operating lease cost | $ | 285,000 | $ | 285,000 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | 285,000 | $ | 285,000 | ||||
| Weighted-average remaining lease term (in years) | 9.25 | 10.25 | ||||||
| Weighted-average discount rate | 4.25 | % | 4.25 | % | ||||
| Year ending June 30, | ||||
| 2019 (excluding the nine months ended March 31, 2019) | $ | 95,000 | ||
| 2020 | 380,000 | |||
| 2021 | 380,000 | |||
| 2022 | 380,000 | |||
| 2023 | 380,000 | |||
| Thereafter | 1,900,000 | |||
| Total lease payments | 3,515,000 | |||
| Present value adjustment | (602,534 | ) | ||
| Total lease liabilities | $ | 2,912,466 | ||
10. LEGAL MATTERS
The Company has incurred costsis subject to a variety of claims and suits that arise from time to time in the ordinary course of business. Although management currently believes that resolving these claims against us, individually or in the aggregate, will continue to incur costs related to enforcing this program. These costs primarily relate to legal fees and other costs involved with the underlying efforts to enforce this portfolio. Dependingnot have a material adverse impact on the responseConsolidated Financial Statements, these matters are subject to inherent uncertainties and management's view of these matters may change in the underlying results of the enforcement program, the Company may enter into licensing arrangements or initiate lawsuits as part of the Company’s efforts to enforce this program. future.
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,” “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), borrowing costs, changes in tax rates, pending or threatened litigation and investigations, and other risk factors which may be detailed from time to time in the Company’s Securities and Exchange Commission filings.
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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
The Company developed stereo headphones in 1958 and has been a leader in the industry. 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.
Results of Operations Summary
• | Net sales for the quarter ended March 31, 2020, decreased $70,806 to $4,789,441, compared to the same quarter last year. For the nine months ended March 31, 2020, net sales decreased $1,693,451 to $14,362,862. Completion of an export OEM project last year and lower sales to European distributors caused the decreased sales. | |
• | Gross profit as a percent of net sales decreased for the three months ended March 31, 2020 compared to the same quarter last year. Gross profit fluctuations were primarily driven by a change in the mix of business by product, customer and sales channel. A significant factor in the nine month decrease was the large back-to-school sale to a domestic retailer at low margin in the quarter ended September 30, 2019. | |
• | Selling, general and administrative expenses for the three months ended March 31, 2020, increased approximately 10% due to higher legal fees and employee benefits. For the nine months ended March 31, 2020, the costs were similar to last year. | |
• | Tax expense for the three and nine months ended March 31, 2020 was minimal due to an offsetting change in the valuation allowance for deferred tax assets. The Company is not recording a tax benefit on the pretax loss because of the uncertainty in realizing the benefits of deferred tax assets. |
Financial Results
The following table presents selected financial data for the third quarter:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
Financial Performance Summary | 2020 | 2019* | 2020 | 2019* | ||||||||||||
Net sales | $ | 4,789,441 | $ | 4,860,247 | $ | 14,362,862 | $ | 16,056,313 | ||||||||
Net sales (decrease) increase % | (1.5 | )% | 10.7 | % | (10.5 | )% | (1.9 | )% | ||||||||
Gross profit | $ | 1,589,776 | $ | 1,655,208 | $ | 4,301,318 | $ | 5,148,888 | ||||||||
Gross profit as % of net sales | 33.2 | % | 34.1 | % | 29.9 | % | 32.1 | % | ||||||||
Selling, general and administrative expenses | $ | 1,687,676 | $ | 1,540,348 | $ | 4,938,983 | $ | 4,889,284 | ||||||||
Selling, general and administrative expenses as % of net sales | 35.2 | % | 31.7 | % | 34.4 | % | 30.5 | % | ||||||||
Interest income | $ | 6,631 | $ | - | $ | 19,955 | $ | - | ||||||||
(Loss) income before income tax provision | $ | (91,269 | ) | $ | 114,860 | $ | (617,710 | ) | $ | 259,604 | ||||||
(Loss) income before income tax as % of net sales | (1.9 | )% | 2.4 | % | (4.3 | )% | 1.6 | % | ||||||||
| Income tax provision | $ | 6,104 | $ | (23,020 | ) | $ | 6,125 | $ | (22,995 | ) | ||||||
Income tax provision as % of (loss) income before income tax | (6.7 | )% | (20.0 | )% | (1.0 | )% | (8.9 | )% | ||||||||
*As adjusted for change in accounting principle (Note 2)
2020 Results Compared with 2019
(comments refer to both the three and nine month periods unless otherwise noted)
For the three and nine months ended March 31, 20192020, net sales declined 1.5% and 2018:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31 | March 31 | |||||||||||||||
| Financial Performance Summary | 2019 | 2018* | 2019 | 2018* | ||||||||||||
| Net sales | $ | 4,860,247 | $ | 4,390,454 | $ | 16,056,313 | $ | 16,365,370 | ||||||||
| Net sales (decrease) increase % | 10.7 | % | (8.0 | )% | (1.9 | )% | (8.1 | )% | ||||||||
| Gross profit | $ | 1,655,208 | $ | 1,013,419 | $ | 5,148,888 | $ | 4,574,073 | ||||||||
| Gross profit as % of net sales | 34.1 | % | 23.1 | % | 32.1 | % | 27.9 | % | ||||||||
| Selling, general and administrative expenses | $ | 1,505,922 | $ | 1,771,295 | $ | 4,798,045 | $ | 5,203,125 | ||||||||
| Selling, general and administrative expenses as % of net sales | 31.0 | % | 40.3 | % | 29.9 | % | 31.8 | % | ||||||||
| Interest expense | $ | — | $ | — | $ | — | $ | 5,218 | ||||||||
| Income (loss) before income tax provision | $ | 149,286 | $ | (757,876 | ) | $ | 350,843 | $ | (634,270 | ) | ||||||
| Income before income tax as % of net sales | 3.1 | % | (17.3 | )% | 2.2 | % | (3.9 | )% | ||||||||
| Income tax provision | $ | (23,020 | ) | $ | 4,274 | $ | (22,995 | ) | $ | 3,047,356 | ||||||
| Income tax provision as % of income before income tax | (15.4 | )% | (0.6 | )% | (6.6 | )% | (480.5 | )% | ||||||||
Net sales in the domestic market were approximately $3,688,000$4,201,000 in the three months ended March 31, 2019, which is a 3.4% increase from2020, compared to approximately $3,612,000 last year's approximately $3,568,000. Net sales to mass retail and certain distributors improved during the quarter. In addition, there have been strong sales to a direct to consumer customer.
Export net sales decreased 52.8% to approximately $589,000 for the three months ended March 31, 2020, compared to approximately $1,249,000 for the same period last year. For the nine months ended March 31, 2020, sales decreased 52.3% to approximately $2,577,000 from $5,403,000 last year. Sales to an export OEM customer, for which the contract ended in December 2018, included chargeswere approximately $973,000 in the first six months last year and accounted for excessa significant portion of the decrease in net sales. Sales to distributors in Europe were the primary drivers for the remainder of the decrease. Management believes these declines were due to distributor efforts to optimize their investment in inventory, the negative impact the US dollar strength and obsolete inventory that were not repeatedtiming of sales related to introduction of new products.
Gross profit decreased to 29.9% for the nine months ended March 31, 2020, compared to 32.1% for the nine months ended March 31, 2019. The lower gross profit in the current year.
Selling, general and administrative expenses for the three months ended March 31, 2020, increased approximately$148,000 or 9.6% compared to the prior year. For the nine months ended March 31, 2020, there was an increase of approximately $50,000 or 1.0% in selling general and administrative expenses. For the three months ended March 31, 2020, the primary factors were an increase in legal and professional fees of approximately $55,000, an increase in employee benefit costs of approximately$24,000 and an increase in testing of new products of approximately $69,000. For the nine months ended March 31, 2020, the increase was caused by higher legal and professional fees of approximately $134,000 for strengthening the Company's intellectual property portfolio, an increase in testing of new products for approximately $82,000 and an increase in employee benefit costs of approximately $73,000. The employee benefit costs were higher due to an increase in the Company match for the 401(k) plan. These impacts were largely offset by a decrease of approximately $95,000in deferred compensation expense and an increase of approximately $121,000 cash surrender value income.
Income tax provision for the three and nine months ended March 31, 2019, decreased compared2020 was generally comprised of the U.S. federal statutory rate of 21% and the effect of state income taxes fully offset by an adjustment to the prior year. Decreasedvaluation allowance for deferred tax assets. The Company is not recording a tax benefit costs, lower sales commissions, decreased engineering testing costs, and lower professional fees caused the decline in expense. Benefit costs declined due to a decrease in the company match to the 401(k) plan and a medical insurance refund received in the three months ended December 31, 2018. Sales commissions were lower due to a decline in domestic sales and reduced commissions to certain outside sales representatives. In the three and nine months ended March 31, 2018, there was more new product engineering testing than was experienced this year. Professional fees were higher in the three and nine months ended March 31, 2018 relating to work performed on the Company's intellectual property. These spending decreases were partially offset by a declinepretax loss because of the uncertainty in cash surrender value income inrealizing the nine months ended March 31, 2019.
The Company has launched a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has incurred costs and will continue to incur costs related to enforcing this program. These costs primarily relate to legal fees and other costs involved with the underlying efforts to enforce this portfolio. Depending on the response to and the underlying results of the enforcement program, the Company may enter into licensing arrangements or initiate lawsuits as part of the Company’s efforts to enforce this program. If successful, the Company may receive royalties, offers to purchase its intellectual property, or other proceeds in amounts that could have a material effect on its financial statements.
The Company has been closely monitoring the COVID-19 situation to protect the same period inhealth and safety of its employees and customers. Business plans are being executed to maintain supply of the prior year becauseCompany’s products to our customers throughout the Company did not draw on its line of credit facility duringworld.
The Company’s financial results for the nine monthsquarter ended March 31, 2019.
The magnitude of the U.S. federal statutory rateCOVID-19 pandemic, including the extent of 21%any impact on the Company’s business, financial position, results of operations or liquidity, which could be material, 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 effectoverall impact on the global economy.
The Company’s supply chain is primarily in southern China. This portion of state income taxes offset by an adjustmentthe Company's supply chain was disrupted early in the quarter ended March 31, 2020. These disruptions are now having little on-going impact. The remaining impacts relate to the valuation allowancemovement of new product introductions and costs. The Company is monitoring the situation closely and the supply chain team has been executing business plans, which include, but are not limited to: (1) being alert to potential short supply situations; (2) accelerating delivery times from key suppliers; and, (3) utilizing alternative sources and/or air freight. 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.
The Company’s financial position remains strong. The Company had $2.1 million of cash and available credit facilities of $5.0 million on March 31, 2020. The Company also received funding under an SBA loan for deferred tax assets. A tax benefit was recognized related$0.5 million to help mitigate the refundremaining impacts of AMT carry forward.
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, cancellation of certain events and limitations on visitor access to facilities.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for the nine months ended March 31, 20192020 and 2018:
| Total cash provided by (used in): | 2019 | 2018* | ||||||
| Operating activities | $ | 1,836,408 | $ | 1,519,302 | ||||
| Investing activities | (241,723 | ) | (381,676 | ) | ||||
| Financing activities | 46,677 | — | ||||||
| Net increase in cash and cash equivalents | $ | 1,641,362 | $ | 1,137,626 | ||||
Total cash provided by (used in): | 2020 | 2019* | ||||||
Operating activities | $ | 339,788 | $ | 1,836,408 | ||||
Investing activities | (504,107 | ) | (241,723 | ) | ||||
Financing activities | - | 46,677 | ||||||
Net (decrease) increase in cash and cash equivalents | $ | (164,319 | ) | $ | 1,641,362 | |||
*As adjusted for retrospective adoption of ASC 606
Operating Activities
The positive operating results plus the decrease in accounts receivable, partially offset by an increase in inventory, drovepayable and the increaseloss from operations were the driving factors for the decrease in cash provided by operating activities during the nine months ended March 31, 2020. There was significant inventory inbound to the U.S. from China as of June 30, 2019 that was paid for during the quarter ended September 30, 2019.
Investing Activities
Cash used in investing activities was lowerhigher for the nine months ended March 31, 2019,2020, as the Company had decreasedincreased expenditures for leasehold improvements and for tooling related to new product introductions. During the fiscal year ending June 30, 2019,2020, the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures similarof approximately $600,000 to last fiscal year.$800,000. 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 March 31, 2019 and 2018,2020, the Company had no outstanding borrowings on its bank line of credit facility.
There were no purchases of common stock in 20192020 or 20182019 under the stock repurchase program. Cash provided in 2019 was from stock options exercised which resulted in the issuance of 22,125 shares of common stock. No stock options were exercised in 2018.2020.
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 borrowings available under its credit facility,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 12, 2010,14, 2019, the Company entered into a secured credit facility (“("Credit Agreement”Agreement") with JPMorgan ChaseTown Bank N.A. (“Lender”). for a two-year term expiring on May 14, 2021. The Credit Agreement providedprovides for an $8,000,000a $5,000,000 revolving secured credit facility andwith interest rates 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 $2,000,000. On June 29, 2017,$1,000,000. There are no unused line fees in the Credit Agreement was amended to reduce the facility to $4,000,000 and to eliminate the financial covenants. On May 9, 2018, the Credit Agreement was amended to extend the expiration to July 31, 2019.credit facility. The Company and the Lender also entered into the Pledge anda General Business Security Agreement dated May 12, 2010,14, 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 March 31, 20192020, and June 30, 2018,2019, 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.
Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
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 March 31, 2019.2020. The Company’s management has concluded that the Company’s disclosure controls and procedures as of March 31, 20192020 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. The Company implemented internal controls to ensure management properly assessed the impact
OTHER INFORMATION
Legal Proceedings |
As of March 31, 2019,2020, the Company is currently involved in the legal mattermatters that isare described in Note 1210 to the condensed consolidated financial statements, which description is incorporated herein by reference.
Risk Factors |
Not applicable.
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 threenine months ended March 31, 2019,2020, by the Company.
COMPANY REPURCHASES OF EQUITY SECURITIES
| Period (2019) | Total # of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan (1) | Approximate Dollar Value of Shares Available under Repurchase Plan | ||||||||||
| January 1 - March 31 | — | $ | — | — | $ | 2,139,753 | ||||||||
Period (2020) | Total # of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan (1) | Approximate Dollar Value of Shares Available under Repurchase Plan | ||||||||||||
July 1 - March 31 | - | $ | - | - | $ | 2,139,753 | ||||||||||
(1) | In April of 1995, the Board of Directors approved a stock repurchase program authorizing the Company to purchase from time to time up to $2,000,000 of its common stock for its own account. Subsequently, the Board of Directors periodically has approved increases in the stock repurchase program. The most recent increase was for an additional $2,000,000 in October 2006, for a maximum of $45,500,000 of which $43,360,247 had been expended through March 31, 2020. |
Exhibits |
Exhibit No. | Exhibit Description |
31.1 |
31.2 | |
32.1 | |
32.2 | |
101 | The following financial information from Koss Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, |
__________________________
* | Filed herewith |
** | |
Furnished herewith |
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.
KOSS CORPORATION | ||
/s/ Michael J. Koss | May | |
Michael J. Koss | ||
Chairman | ||
Chief Executive Officer | ||
/s/ David D. Smith | May | |
David D. Smith | ||
Chief Financial Officer | ||
Principal Accounting Officer | ||