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, 20212022
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 25, 2021,24, 2022, there were 9,137,7959,179,795 shares outstanding of the registrant’s common stock.
KOSS CORPORATION
FORM 10-Q
September 30, 20212022
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| Condensed Consolidated Balance Sheets as of September 30, | 3 |
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| Management's Discussion and Analysis of Financial Condition and Results of Operations |
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
KOSS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 2021 | June 30, 2021 | September 30, 2022 | June 30, 2022 | |||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 7,233,248 | $ | 6,950,215 | $ | 20,870,957 | $ | 9,208,170 | ||
Accounts receivable, less allowance for doubtful accounts of $41,980 and $41,499, respectively | 2,119,718 | 2,240,785 | ||||||||
Accounts receivable, less allowance for doubtful accounts of $9,496 and $2,027, respectively | 1,773,132 | 1,846,620 | ||||||||
Inventories, net | 7,292,203 | 5,901,512 | 7,898,496 | 8,631,362 | ||||||
Prepaid expenses and other current assets | 650,091 | 456,004 | 398,467 | 188,478 | ||||||
Total current assets | 17,295,260 | 15,548,516 | 30,941,052 | 19,874,630 | ||||||
Equipment and leasehold improvements, net | 1,257,936 | 1,281,180 | 1,032,180 | 1,088,017 | ||||||
Other assets: | ||||||||||
Operating lease right-of-use assets | 2,234,363 | 2,305,455 | ||||||||
Operating lease right-of-use asset | 3,190,862 | 3,247,725 | ||||||||
Cash surrender value of life insurance | 7,451,804 | 7,188,994 | 5,973,016 | 5,744,724 | ||||||
Total other assets | 9,686,167 | 9,494,449 | 9,163,878 | 8,992,449 | ||||||
Total assets | $ | 28,239,363 | $ | 26,324,145 | $ | 41,137,110 | $ | 29,955,096 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 1,022,945 | $ | 398,433 | $ | 521,417 | $ | 796,163 | ||
Accrued liabilities | 653,906 | 665,567 | 1,514,699 | 560,356 | ||||||
Deferred revenue | 616,602 | 694,632 | 393,252 | 543,891 | ||||||
Operating lease liability | 292,030 | 288,949 | 227,124 | 223,530 | ||||||
Income taxes payable | 5,574 | 4,543 | 600,974 | 3,033 | ||||||
Total current liabilities | 2,591,057 | 2,052,124 | 3,257,466 | 2,126,973 | ||||||
Long-term liabilities: | ||||||||||
Deferred compensation | 2,542,792 | 2,491,482 | 1,979,530 | 1,937,229 | ||||||
Deferred revenue | 184,517 | 188,932 | 133,113 | 169,210 | ||||||
Operating lease liability | 1,942,333 | 2,016,506 | 2,966,294 | 3,024,195 | ||||||
Total long-term liabilities | 4,669,642 | 4,696,920 | 5,078,937 | 5,130,634 | ||||||
Total liabilities | 7,260,699 | 6,749,044 | 8,336,403 | 7,257,607 | ||||||
Stockholders' equity: | ||||||||||
Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 9,137,795 and 8,608,706, respectively | 45,689 | 43,044 | ||||||||
Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 9,179,795 and 9,147,795, respectively | 45,899 | 45,739 | ||||||||
Paid in capital | 12,302,395 | 10,802,118 | 12,811,717 | 12,653,402 | ||||||
Retained earnings | 8,630,580 | 8,729,939 | 19,943,091 | 9,998,348 | ||||||
Total stockholders' equity | 20,978,664 | 19,575,101 | 32,800,707 | 22,697,489 | ||||||
Total liabilities and stockholders' equity | $ | 28,239,363 | $ | 26,324,145 | $ | 41,137,110 | $ | 29,955,096 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended | Three Months Ended | |||||||||
September 30 | September 30 | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Net sales | $ | 4,365,067 | $ | 5,208,295 | $ | 3,354,529 | $ | 4,365,067 | ||
Cost of goods sold | 2,783,230 | 3,572,067 | 2,168,305 | 2,783,230 | ||||||
Gross profit | 1,581,837 | 1,636,228 | 1,186,224 | 1,581,837 | ||||||
Selling, general and administrative expenses | 1,780,798 | 1,505,772 | 23,670,596 | 1,780,798 | ||||||
(Loss) income from operations | (198,961) | 130,456 | ||||||||
(Loss) from operations | (22,484,372) | (198,961) | ||||||||
Other income | 100,000 | — | 33,000,000 | 100,000 | ||||||
Interest income (expense) | 633 | (2,051) | ||||||||
Interest income | 27,056 | 633 | ||||||||
(Loss) income before income tax provision | (98,328) | 128,405 | ||||||||
Income (loss) before income tax provision | 10,542,684 | (98,328) | ||||||||
Income tax provision | 1,031 | 1,477 | 597,941 | 1,031 | ||||||
Net (loss) income | $ | (99,359) | $ | 126,928 | ||||||
Net income (loss) | $ | 9,944,743 | $ | (99,359) | ||||||
(Loss) income per common share: | ||||||||||
Income (loss) per common share: | ||||||||||
Basic | $ | (0.01) | $ | 0.02 | $ | 1.09 | $ | (0.01) | ||
Diluted | $ | (0.01) | $ | 0.02 | $ | 1.01 | $ | (0.01) | ||
Weighted-average number of shares: | ||||||||||
Basic | 8,843,946 | 7,404,831 | 9,157,284 | 8,843,946 | ||||||
Diluted | 8,843,946 | 7,408,685 | 9,849,043 | 8,843,946 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended | Three Months Ended | |||||||||
September 30 | September 30 | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Operating activities: | ||||||||||
Net (loss) income | $ | (99,359) | $ | 126,928 | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||||
Net income (loss) | $ | 9,944,743 | $ | (99,359) | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||
Provision for doubtful accounts of accounts receivable | 480 | 10,698 | 7,469 | 480 | ||||||
Depreciation of equipment and leasehold improvements | 80,438 | 74,278 | 67,610 | 80,438 | ||||||
Noncash operating lease expense | 2,556 | — | ||||||||
Stock-based compensation expense | 138,876 | 152,994 | 88,035 | 138,876 | ||||||
Change in cash surrender value of life insurance | (167,084) | (157,285) | (140,298) | (167,084) | ||||||
Provision for deferred compensation | 88,810 | 21,000 | 42,301 | 88,810 | ||||||
Deferred compensation paid | (37,500) | (37,500) | — | (37,500) | ||||||
Net changes in operating assets and liabilities: | ||||||||||
Accounts receivable | 120,587 | (922,662) | 66,019 | 120,587 | ||||||
Inventories | (1,390,691) | 241,541 | 732,866 | (1,390,691) | ||||||
Prepaid expenses and other current assets | (194,087) | (200,115) | (209,989) | (194,087) | ||||||
Income taxes receivable | — | 1,479 | ||||||||
Income taxes payable | 1,031 | — | 597,941 | 1,031 | ||||||
Accounts payable | 624,512 | 111,250 | (274,746) | 624,512 | ||||||
Accrued liabilities | (11,661) | 269,335 | 954,343 | (11,661) | ||||||
Deferred revenue | (82,445) | 127,159 | (186,736) | (82,445) | ||||||
Net cash (used in) operating activities | (928,093) | (180,900) | ||||||||
Net cash provided by (used in) operating activities | 11,692,114 | (928,093) | ||||||||
Investing activities: | ||||||||||
Purchase of equipment and leasehold improvements | (57,194) | (264,996) | (11,773) | (57,194) | ||||||
Life insurance premiums paid | (95,726) | (103,568) | (87,994) | (95,726) | ||||||
Net cash (used in) investing activities | (152,920) | (368,564) | (99,767) | (152,920) | ||||||
Financing activities: | ||||||||||
Proceeds from exercise of stock options | 1,364,046 | — | 70,440 | 1,364,046 | ||||||
Net cash provided by financing activities | 1,364,046 | — | 70,440 | 1,364,046 | ||||||
Net increase (decrease) in cash and cash equivalents | 283,033 | (549,464) | ||||||||
Net increase in cash and cash equivalents | 11,662,787 | 283,033 | ||||||||
Cash and cash equivalents at beginning of period | 6,950,215 | 3,999,409 | 9,208,170 | 6,950,215 | ||||||
Cash and cash equivalents at end of period | $ | 7,233,248 | $ | 3,449,945 | $ | 20,870,957 | $ | 7,233,248 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
Three Months Ended September 30, 2021 | |||||||||||||
Common Stock | Paid in | Retained | |||||||||||
Shares | Amount | Capital | Earnings | Total | |||||||||
Balance, June 30, 2021 | 8,608,706 | $ | 43,044 | $ | 10,802,118 | $ | 8,729,939 | $ | 19,575,101 | ||||
Net (loss) | — | — | — | (99,359) | (99,359) | ||||||||
Stock-based compensation expense | — | — | 138,876 | — | 138,876 | ||||||||
Stock option exercises | 529,089 | 2,645 | 1,361,401 | — | 1,364,046 | ||||||||
Balance, September 30, 2021 | 9,137,795 | $ | 45,689 | $ | 12,302,395 | $ | 8,630,580 | $ | 20,978,664 | ||||
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 | ||||
Three Months Ended September 30, 2020 | |||||||||||||
Common Stock | Paid in | Retained | |||||||||||
Shares | Amount | Capital | Earnings | Total | |||||||||
Balance, June 30, 2020 | 7,404,831 | $ | 37,024 | $ | 6,882,729 | $ | 8,236,345 | $ | 15,156,098 | ||||
Net income | — | — | — | 126,928 | 126,928 | ||||||||
Stock-based compensation expense | — | — | 152,994 | — | 152,994 | ||||||||
Balance, September 30, 2020 | 7,404,831 | $ | 37,024 | $ | 7,035,723 | $ | 8,363,273 | $ | 15,436,020 | ||||
Three Months Ended September 30, 2021 | |||||||||||||
Common Stock | Paid in | Retained | |||||||||||
Shares | Amount | Capital | Earnings | Total | |||||||||
Balance, June 30, 2021 | 8,608,706 | $ | 43,044 | $ | 10,802,118 | $ | 8,729,939 | $ | 19,575,101 | ||||
Net (loss) | — | — | — | (99,359) | (99,359) | ||||||||
Stock-based compensation expense | — | — | 138,876 | — | 138,876 | ||||||||
Stock option exercises | 529,089 | 2,645 | 1,361,401 | — | 1,364,046 | ||||||||
Balance, September 30, 2021 | 9,137,795 | $ | 45,689 | $ | 12,302,395 | $ | 8,630,580 | $ | 20,978,664 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20212022
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The condensed consolidated balance sheets as of September 30, 20212022 and June 30, 2021,2022, the condensed consolidated statements of operations for the three months ended September 30, 20212022 and 2020,2021, the condensed consolidated statements of cash flows for the three months ended September 30, 20212022 and 2020,2021, and the condensed consolidated statements of stockholders' equity for the three months ended September 30, 20212022 and 2020,2021, 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 disclosuredisclosures 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, 2021.2022.
The preparation of financial statements in conformity with U.S. GAAP requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, income tax valuation allowance, non-cash stock-based compensation and deferred compensation. Actual results could differ from the Company's estimates.
B) INCOME TAXES
AWe 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, 2022, additional income generated by licensing fees that were offset by related legal fees and expenses, resulted in taxable income for the period. The utilization of net operating loss carryforwards significantly reduced the taxable income, resulting in a state tax provision of $148,838 and federal income tax provision of $449,103. During the three months ended September 30, 2021, a state tax provision of $1,031 and $1,477 was recorded. There was no federal tax provision recorded for the three months ended September 30, 2021 and 2020, respectively. The federal income tax expense was 0 for the three months ended September 30, 2021 and 2020.2021.
In the three months ended September 30, 2021, stock option exercises resulted in tax deductible compensation expenseThe Company expects to utilize a portion of approximately $7,800,000. The deduction of this stock option exercise compensation expense will cause aits tax loss incarryforwards for the year ended June 30, 2022, which will be carried forward to future tax years. The expected2023 and the Company's remaining tax loss carryforward including the stock-based compensation expense deductions in the three months ended September 30, 2021, will be approximately $39,900,000.$30,500,000. The additionalexpected utilization of the estimated tax loss carryforward increaseddecreased the deferred tax asset to approximately $12,100,000$9,300,000 as of September 30, 2021,2022, and the future realization of this iscontinues to be uncertain. The valuation allowance was increasedalso decreased to fully offset the deferred tax asset.
C) OTHER INCOME
In July 2021, the Company entered intoasset as there is sufficient negative evidence to support 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 has been treated as other income and shown as a separate line on the condensed consolidated statement of operations. There was a related payment of $100,000 to a third party that was charged to legal expense in the quarter.
full valuation allowance.
Temporary differences which give rise to deferred income tax assets and liabilities at September 30, 2022 and June 30, 2022 include:
September 30, 2022 | June 30, 2022 | ||||
Deferred income tax assets: | |||||
Deferred compensation | $ | 489,409 | $ | 479,340 | |
Stock-based compensation | 110,179 | 107,499 | |||
Accrued expenses and reserves | 575,687 | 551,562 | |||
Deferred revenue | 166,358 | 176,447 | |||
Federal and state net operating loss carryforwards | 7,498,610 | 9,942,511 | |||
Credit carryforwards | 300,889 | 292,155 | |||
Equipment and leasehold improvements | 110,659 | 122,764 | |||
Lease liability | 789,533 | 803,603 | |||
Valuation allowance | (9,251,287) | (11,671,606) | |||
Total deferred income tax assets | 790,037 | 804,275 | |||
Deferred income tax liabilities: | |||||
ROU asset | (789,533) | (803,603) | |||
Other | (504) | (672) | |||
Net deferred income tax assets | $ | - | $ | - | |
C) LEGAL COSTS
All legal costs related to litigation, for which the Company is liable, are charged to operations as incurred, except settlements, which are expensed when a claim is probable and can be reasonably estimated. Recoveries of legal costs are recorded when the amount and items to be paid are confirmed by the third party. Proceeds from the settlement of legal disputes are recorded in income when the amounts are determinable, and the collection is certain. Related legal fees and expenses are recorded in selling, general and administrative expense at that time.
D) OTHER INCOME
In the period ending September 30, 2022, the Company received licensing proceeds of $33,000,000, which were recorded as other income. Other income is shown as a separate line on the condensed consolidated statements of operations.
In the period ending September 30 2021, the Company received licensing proceeds of $100,000, which were also recorded as other income. Other income is shown as a separate line on the condensed consolidated statements of operations.
E) DEFERRED COMPENSATION
The Company’s deferred compensation liability is for a current officer and is calculated based on various assumptions which 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 deferred compensation liability recorded at September 30, 2022 and June 30, 2022, is $1,979,530 and $1,937,229, respectively. Deferred compensation expense of $42,301 and $88,810 was recognized under this arrangement in the three months ended September 30, 2022 and September 30, 2021, respectively.
F) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 and notes receivables. The new guidance represents significant changes to accounting for credit losses. The current incurred loss impairment model that recognizes losses when a probable threshold is met will be replaced with the expected credit loss impairment method without recognition threshold. The expected credit losses estimate will be based upon historical information, current conditions, and reasonable and supportable forecasts. On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain smaller public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition. As such, ASC Topic 326 will be effective for the Company for the fiscal year ending June 30, 2024. Management is currently assessing the impact of the adoption of this standard on the Company’s financial statements.
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 are or not believed by management to have a
2. INVENTORIES
The components of inventories were as follows:
September 30, 2021 | June 30, 2021 | September 30, 2022 | June 30, 2022 | |||||||
Raw materials | $ | 2,147,199 | $ | 2,067,572 | $ | 2,228,870 | $ | 2,217,621 | ||
Finished goods | 6,885,788 | 5,621,228 | 7,523,432 | 8,302,546 | ||||||
Inventories, gross | 9,032,987 | 7,688,800 | 9,752,302 | 10,520,167 | ||||||
Reserve for obsolete inventory | (1,740,784) | (1,787,288) | (1,853,806) | (1,888,805) | ||||||
Inventories, net | $ | 7,292,203 | $ | 5,901,512 | $ | 7,898,496 | $ | 8,631,362 | ||
3. CREDIT FACILITY AND SBA LOAN
On May 14, 2019, the Company entered into a secured credit facility ("Credit Agreement"“Credit Agreement”) with Town Bank (“Lender”). The Credit Agreement provides for a $5,000,000 revolving secured credit facility with an interest rate 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 $1,000,000. There are 0no 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 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. As of September 30, 2021,2022, the Company was in compliance with all covenants related to the Credit Agreement. As of September 30, 2021,2022, and June 30, 2021,2022, there were 0no outstanding borrowings on the facility.
4. REVENUE RECOGNITION
The Company disaggregates it'sits net sales by geographical location as it believes it best depicts how the nature, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table summarizes net sales by geographical location:
Three Months Ended | Three Months Ended | |||||||||
September 30, | September 30, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
United States | $ | 2,787,519 | $ | 3,939,077 | $ | 2,712,751 | $ | 2,787,519 | ||
Export | 1,577,548 | 1,269,218 | 641,778 | 1,577,548 | ||||||
Net Sales | $ | 4,365,067 | $ | 5,208,295 | $ | 3,354,529 | $ | 4,365,067 | ||
Deferred revenue relates primarily to consumer and customer warranties. These constitute future performance obligations, and the Company defers revenue related to these future performance obligations. TheEffective July 1, 2022, the Company decreased its deferral rates from 3% to 2.4% for domestic sales and from 14% to 10% for export sales to reflect recent warranty experience. In the three months ended September 30, 2022 and 2021, the Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $153,221$167,939 and $111,030 in the three months ended September 30, 2021 and 2020,$153,221 respectively, for performance obligations related to consumer and customer warranties. The deferred revenue liability was $593,920$883,564 as of June 30, 2020.2021. The Company estimates that the deferred revenue performance obligations are satisfied within one year to three years and therefore uses that same time frame for recognition of the deferred revenue.
5. INCOME (LOSS) INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE
Basic income (loss) income per share is computed based on the weighted-average number of common shares outstanding. Diluted income (loss) 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 (loss) income per share:
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Numerator | ||||||||||
Net (loss) income | $ | (99,359) | $ | 126,928 | ||||||
Net income (loss) | $ | 9,944,743 | $ | (99,359) | ||||||
Denominator | ||||||||||
Weighted average shares, basic | 8,843,946 | 7,404,831 | 9,157,284 | 8,843,946 | ||||||
Dilutive effect of stock compensation awards (1) | — | 3,854 | 691,759 | — | ||||||
Diluted shares | 8,843,946 | 7,408,685 | 9,849,043 | 8,843,946 | ||||||
Net (loss) income attributable to common shareholders per share: | ||||||||||
Net income (loss) attributable to common shareholders per share: | ||||||||||
Basic | $ | (0.01) | $ | 0.02 | $ | 1.09 | $ | (0.01) | ||
Diluted | $ | (0.01) | $ | 0.02 | $ | 1.01 | $ | (0.01) | ||
(1) Excludes approximately 1,500,528 and 2,750,176 weighted average stock options forduring the three months ended September 30, 2021, and 2020, respectively, as the impact of such awards was anti-dilutive. For the three months ended September 30, 2022, no stock options were anti-dilutive.
6. RELATED PARTY LEASETRANSACTIONS
The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly-ownedcontrolled by five equal ownership interests in trusts held by the 5 beneficiaries of a former Chairman.Chairman’s revocable trust. On January 5, 2017,May 24, 2022, the lease was renewed for a period of five years, ending June 30, 2023,2028, 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 samean increased rate of $397,000 for an additional five years ending June 30, 2028.2033. The negotiated increase in rent slated for 2028 will be the first increase in rent since 1996. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership.
During the three months ended September 30, 2022, the Company made a charitable contribution of $79,000 to the Koss Foundation (the “Foundation”), a 501(c)(3) charitable organization for which Michael J. Koss and John C. Koss Jr., executive officers of the Company, serve as officers. Neither officer receives fees or compensation from the Foundation for holding these positions. There were no charitable contributions made to the Foundation during the three months ended September 30, 2021.
7. ACCOUNTS RECEIVABLE CONCENTRATIONS
As of September 30, 20212022, the Company’s top 3four accounts receivable customers represented approximately 28%19%, 18%15%, 13%, and 13%10% of trade accounts receivables. These same customers represented approximately 19%, 0%18%, 3%, and 24%0% of trade accounts receivable at June 30, 2021.
2022.
8. LEGAL MATTERS
As of September 30, 2021,2022, the Company is involved in the matters described below:
• In July 2020,The Company maintains a program focused on enforcing its intellectual property and, in particular, certain patents in its patent portfolio. As part of this program, the Company filed complaints in United States District Court against each of Apple Inc., Bose Corporation, PEAG, LLC d/b/a JLab Audio, Plantronics, Inc. and Polycom, Inc., and Skullcandy, Inc. The complaints allegecertain parties alleging infringement on the Company’s patents relating to its wireless audio technology. In the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts will be due to third parties. The Company does not expect tomay incur additional fees and costs related to these lawsuits, that will have a materialhowever, timing and impact toon its financial statements.statements is uncertain. Depending on the response to and the underlying results of the enforcement program, the Company may continue to litigate its claims, enter into licensing arrangements or reach some other outcome potentially advantageous to its competitive position. During the period ended September 30, 2022 in connection with its program focused on enforcing its intellectual property, legal fees and related expenses of $21,016,408 were recorded as selling, general, and administrative expense.
• Early in fiscal year 2020, theThe Company was notified by One E-Way,One-E-Way, Inc. that some of the Company's wireless products may infringe on certain One E-WayOne-E-Way patents. NaNNo lawsuits involving these allegations have yet been filed and served on the Company. The Company is currently investigating whether these allegations have any merit. Depending on the results of the investigation and the defense of these allegations, the ultimate resolution of this matter may have a material effect on the Company's financial statements. The Company estimates that this matter will ultimately be resolved at a cost of approximately $41,000 and has been accrued as of September 30, 2022 and June 30, 2022.
The ultimate resolution of these matters is not determinable unless otherwise noted.
We are also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving these claims against us, individually or in the aggregate, will not have a material adverse impact on our Condensed Consolidated Financial Statements,condensed consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“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 “aims,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “thinks,” “may,” “will,” “shall,” “should,” “could,” “would,” “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), the effects of the COVID-19 pandemic on the economy, the impact of the Russian-Ukrainian conflict and the Company’s operations, borrowing costs, changes in tax rates, pending or threatened litigation and investigations, and other risk factors described in the Risk Factors and in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 20212022 and subsequently filed Quarterly Reports on Form 10-Q
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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company initially developed stereo headphones in 1958 and has been recognized as a leader in the industry ever since. 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, as its principal business line is the design, manufacture and sale of stereo headphones and related accessories.
Financial Results
The following table presents selected financial data for the three months ended September 30, 20212022, and 2020:2021:
Three Months Ended | Three Months Ended | |||||||||
September 30 | September 30 | |||||||||
Financial Performance Summary | 2021 | 2020 | 2022 | 2021 | ||||||
Net sales | $ | 4,365,067 | $ | 5,208,295 | $ | 3,354,529 | $ | 4,365,067 | ||
Net sales (decrease) % | (16.2)% | (3.7)% | (23.2)% | (16.2)% | ||||||
Gross profit | $ | 1,581,837 | $ | 1,636,228 | $ | 1,186,224 | $ | 1,581,837 | ||
Gross profit as % of net sales | 36.2% | 31.4% | 35.4% | 36.2% | ||||||
Selling, general and administrative expenses | $ | 1,780,798 | $ | 1,505,772 | $ | 23,670,596 | $ | 1,780,798 | ||
Selling, general and administrative expenses as % of net sales | 40.8% | 28.9% | 705.6% | 40.8% | ||||||
Interest income (expense) | $ | 633 | $ | (2,051) | ||||||
Interest income | $ | 27,056 | $ | 633 | ||||||
Other income | $ | 100,000 | $ | — | $ | 33,000,000 | $ | 100,000 | ||
(Loss) income before income tax provision | $ | (98,328) | $ | 128,405 | ||||||
(Loss) income before income tax as % of net sales | (2.3)% | 2.5% | ||||||||
Income (loss) before income tax provision | $ | 10,542,684 | $ | (98,328) | ||||||
Income (loss) before income tax as % of net sales | 314.3% | (2.3)% | ||||||||
Income tax provision | $ | 1,031 | $ | 1,477 | $ | 597,941 | $ | 1,031 | ||
Income tax provision as % of (loss) income before income tax | (1.0)% | 1.2% | ||||||||
Income tax provision as % of income (loss) before income tax | 5.7% | (1.0)% | ||||||||
Quarter Ended September 30, 2021Fiscal 2023 Period Results Compared with Fiscal 2022 Period
(comments refer to the three-month period ended September 30 2020unless otherwise noted)
ForNet sales for the three monthsquarter ended September 30, 2021, net sales2022 decreased 16.2%23.2%. The approximately $843,000$1,011,000 decrease in net sales was driven by declines in the domestic markets that wereEuropean market and sales to certain of our distributors, partially offset by strength73% growth in European markets.direct-to-consumer (DTC) sales.
Net sales in the domestic market were approximately $2,788,000$2,713,000 in the three months ended September 30, 2021,2022, compared to approximately $3,939,000$2,788,000 in the prior year period. NetWhile net sales to certain distrbutors were negatively impactedour largest distributor increased 85% over the same period in the quarter ended September 30, 2021 due to timingprior year, certain other distributors were down nearly $600,000, or 66%, as a result of shipmentstighter inventory management and inventory levels at those distributors causing them to decrease orders. Product shipments have been negatively impacted due to delays in U.S. ports. The Company made the final shipment of a non Koss branded product to a mass retailerreduction in the US during the quarter ended March 31, 2021.level of COVID-19 stimulus disbursements. The loss of netgrowth in DTC sales for this product was approximately $727,000 at lower than normal margins.mostly offset these declines.
Export net sales increased to approximately $1,578,000 for the three months ended September 30, 2021, compared2022 were down significantly versus the prior year period. The decrease of $936,000, or 59%, was almost entirely attributable to approximately $1,269,000 foran overall reduction in sales to European distributors. There were no sales to Russia or Ukraine during the same period lastthree months ended September 30, 2022 due to the ongoing conflict between the two countries, resulting in a decrease of $263,000 in export sales year over year. Sales to distributors in Europe were the primary drivers for the increase. A significant portion of the increase was related to new products, introduced in the last year, as well as increased sales of headphones used for working and studying remotely. The sell through for certain of the new products has steadily increased since their introduction.
Gross profit increasedmargin decreased slightly to 35.4% for the three months ended September 30, 2022, compared to 36.2% for the three months ended September 30, 2021, compared to 31.4% for the three months ended September 30, 2020. Sales2021. While sales in the current year reflect a more favorable mix by marketsdue to increased, higher margin sales to the distributor class and products. TheDTC, as well as decreased lower margin sales to Europe distributors, the resulting higher gross profit inmargins were partially offset by the impact of working through the inventory investment made while freight costs were higher. Margins were also negatively impacted by increased product compliance testing that occurred during the first three months of the current year was partially due to lost placement at a U.S. based mass retailer, which was low margin business. fiscal year.
LateThe Company experienced lower freight rates during the quarter ended September 30, 2022 driven by reduced container demand. Delays throughout the supply chain continue as a result of the persistence of COVID-19 in all parts of the world, however, the delays were not overly impactful to the Company as bookings have continued without incident. The threat of a rail strike during the current quarter was initially tempered due to bargaining sessions held as a result of direct intervention by President Biden. Unfortunately, a tentative agreement has since been rejected, renewing the threat that there could be a strike that shuts down a vital link in the fiscal year ended June 30, 2021,nation’s already struggling supply chain. The Company continues to monitor the situation as a rail strike would negatively impact the Company began experiencingwith increased operating costs and delays in product shipments from suppliers in Asia. The disruption at the ports on the U.S. west coast, as well as congestion in domestic railyards, has caused delays and significantly increased inbound shipping costs. The higher shipping costs will negatively impact margins in the forseeable future. The Company is implementing various pans to mitigate the negative impacts of these higher costs.shipments.
Selling, general and administrative expenses for the three months ended September 30, 20212022 increased 18.3% or approximately $275,000$21,890,000 to $23,671,000. The increase was predominantly driven by approximately $1,781,000. The primary factor$21,016,000 in legal fees and expenses incurred as a result of litigation related to patent defense that was resolved during the quarter. A total of approximately $979,000 in bonus and profit-sharing accruals were recorded related to the increased net income before income taxes for the quarter due to licensing proceeds received during the three months ended September 30, 2022, partially offset by the aforementioned legal fees and expenses. A decrease of $118,000 in employer taxes on stock option exercises of approximately $121,000slightly offset the significant increase in expense for the current three-month period.
Other income for the three months ended September 30, 2021. There was also approximately2022 consisted entirely of $33,000,000 in licensing proceeds. These proceeds are similar to the $100,000 of expense related to a license agreement entered intolicensing fee received in July 2021 as well as increased deferred compensation expenses.the prior year three-month period.
Income tax expense for the three months ended September 30, 2021,2022 was approximately $600,000 and was comprised of the U.S. federal statutory rate of 21% and the effect ofblended state income taxestax rate of approximately 3.7%, offset by an adjustment to the valuation allowance for deferred tax assets. On December 22, 2017,the Tax Cuts and Jobs Act (TCJA) was enacted which changed the rules for deducting net operating losses (NOLs). Before 2017, 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 net income. The Company’s NOL carryforwards from fiscal 2017 and 2018 could be utilized to offset net income at 100 percent. The effective tax rate was 5.6% in the three months ended September 30, 2022 and less than 1% in the three months ended September 30, 2021 and 2020.2021. 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 net operating loss carryforwards that existed as of June 30, 2021, plus the additional federal net operating loss carryforward generated by the deductible compensation expense on stock option exercises in the quarter ended September 30, 2021.2022.
In the three months ended September 30, 2021,2022, stock option exercises resulted in tax deductible compensation expense of approximately $7,800,000. The deduction$179,000 and will offset some of this stock option exercise compensation expense will cause a taxthe income generated by the net licensing proceeds. Net operating loss incarryforwards were utilized to reduce the year ended June 30, 2022, which will be carried forward to future tax years. Thetaxable income and, as such, the remaining expected federal tax loss carryforward includingis expected to approximate $30,500,000 by the stock-based compensation expense deductions inend of the three months ended September 30, 2021, will be approximately $39,900,000.fiscal year. The additionalquarterly adjustment to the estimated tax loss carryforward increaseddecreased the deferred tax asset to approximately $12,100,000$9,300,000 as of September 30, 2021,2022, and the future realization of this iscontinues to be uncertain. The valuation allowance was increasedalso decreased to fully offset the deferred tax asset.asset as there is sufficient negative evidence to support the maintaining of a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative net loss is expected.
As previously reported, the Company launchedmaintains a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has enforced its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless headphone technology. If the program isefforts are successful, the Company may receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position;position from time to time; however, there is no guarantee of a positive outcome from these efforts in the future, which could ultimately be time consuming and unsuccessful. Additionally, in the event that aall or portions of monetary awardawards or judgment isjudgments received by the Company in connection with these complaints, all or portions of such amounts will be due to third parties.
The Company believes that its financial position remains strong. The Company had $7.2$20.9 million of cash and cash equivalents and available credit facilities of $5.0 million aton September 30, 2021. 2022.
COVID-19 ImpactRecent Events
Recent events continuing to impact our business include COVID-19, the inflationary cost environment, disruption in our supply chain, and most recently the threatened rail strike in the U.S., and the ongoing crisis in Eastern Europe. As more fully described below, we expect each of these factors will impact our fiscal 2023 performance.
While the impact of these factors remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, or results of operations. These and other uncertainties with respect to these recent events could result in changes to our current expectations.
COVID-19:The Company has been closely monitoringmonitored the impact of COVID-19 situation(including the emergence of variants) to protect the health and safety of its employees and customers. Business plans are being continuously updated and executed to maintain supply of the Company’s products to our customers throughout the world.
While we expect the impacts of COVID-19 on our business to moderate, there still remains uncertainty around the pandemic. As a result of the COVID-19 pandemic, uncertainty with respect to its economic effects has impacted not only our operating results but also the global economy. The Company continuedextent and nature of government actions to see strong demandease restrictions are varied based upon the current extent and severity of the COVID-19 pandemic within their respective countries and localities. The sweeping COVID -19 restrictions enacted in China to strictly prevent the quarter ended September 30, 2021 for specific communication headphones as people continued to work from home and studied online due to COVID-19 related directives. However, certain retail businesses throughoutspread of the Company’s markets, particularlyvirus could potentially impact sales if they result in certain European markets, have seen continued disruption.disruptions of inventory replenishment. The Company expects the negative sales impacts caused by thisgovernmental responses to COVID-19, and the disruption in certain retail businesses to continue until markets re-openwhile new variants of the virus continue to emerge and consumer spending returns to normal.spread.
The ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on the Company’s business, financial position, results of operations or liquidity, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation. The Company's future results will be determined by the effectiveness of the vaccines, rollout of vaccine boosters, the duration of governmental pandemic restrictions, the pandemic, impact of variants, its geographic spread, further business disruptions and the overall impact on the economy throughout the globe.world.
To protect the safety, health and well-being of employees, customers, and suppliers, the Company continues to maintain several preventive measures while also meeting the needs of global customers. These measures include increased frequency of cleaning and disinfecting of facilities, and may also include, as necessary, social distancing practices, remote working, restrictions on business travel, holding certain events virtually and limitations on visitor access to facilities.
The Company is committed to executing these plans and will remain in close contact with its supply chain to monitor future possible implications, especially on production facilities.
Inflationary Cost Environment and Supply Chain Disruption – During the first half of fiscal 2022, we began experiencing inflationary cost increases in our commodities, packaging materials, wages and transportation costs. Higher energy costs caused inflation to rise further in the back half of the prior fiscal year and has continued into the current fiscal year. These increases have been partially mitigated by pricing actions implemented by the Company in the third quarter of last year, with another planned for the third quarter of the current fiscal year, as well as working with a dedicated freight forwarding partner to minimize freight rate increases.
The Company’s supply chain is primarily in southern China. Over past twelve months,Since late fiscal year 2021, the Company has experienced issues related to the availability of containers and routingroutings to move products in a cost effective and time efficient manner. There have also been impacts to the movement of new product introductions and costs. The Company is monitoring the situation closely and the supply chain team has modified business plans, which include, but are not limited to: (1) increasing the investment in inventory; (2) being alert to potential short supply situations; (3)(2) assisting suppliers with acquisition of critical components; and (4)(3) utilizing alternative sources and/or air freight. Additionally, the threat of a rail strike in the U.S. could potentially exacerbate the existing disruption in the supply chain and impact product shipments from suppliers and to customers.
To protectRussia’s Invasion of Ukraine: The ongoing Russia-Ukraine conflict and the safety, healthsanctions imposed in response to this conflict have increased global economic and well-being of employees, customers, and suppliers,political uncertainty. In accordance with the Executive Order declared on April 6, 2022, the Company continuessuspended sales into Russia. Also, given the continued humanitarian crisis in Ukraine as a result of the conflict, and the population seeking refuge in other countries, sales to implement several preventive measures whileUkraine have also meetingceased. Neither Russia nor Ukraine constitutes a significant portion of the needsbusiness, combining for less than 5% of global customers. They include increased frequencynet sales for the three months ended March 31, 2022, the last quarter prior to the Executive Order. As a result, there was not a material impact on sales in the current quarter. We are uncertain, however, of cleaning and disinfectingthe impact it will have on our results of facilities, social distancing practices, remote working when possible, restrictions on business travel, holding certain events virtually and limitations on visitor access to facilities.operations in the future if the conflict continues.
Liquidity and Capital Resources
Cash Flows
The following table summarizes cash flows from operating, investing and financing activities for the three months ended September 30, 20212022 and 2020:2021:
Total cash provided by (used in): | 2021 | 2020 | 2022 | 2021 | ||||||
Operating activities | $ | (928,093) | $ | (180,900) | $ | 11,692,114 | $ | (928,093) | ||
Investing activities | (152,920) | (368,564) | (99,767) | (152,920) | ||||||
Financing activities | 1,364,046 | — | 70,440 | 1,364,046 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 283,033 | $ | (549,464) | ||||||
Net increase in cash and cash equivalents | $ | 11,662,787 | $ | 283,033 | ||||||
Operating Activities
The investment in inventories was the driving factor for the increase in cash usedprovided by operating activities during the three months ended September 30, 2021.2022 is almost entirely the result of licensing proceeds received, coupled with the increase in income tax, bonus and profit-sharing accruals that are a direct result of the increased net income. The Company has increasedimpact of the licensing fees was partially offset by an increase in prepaid expenses due to the annual premiums paid for insurance renewal and the decrease in accounts payable as investment in inventories normalizes. The driving factor for the use of cash in the same three-month period in the prior year was the investment in inventory made to ensure availability of communication headphones and to provide better inventory positions on key products to mitigate the continued impacts of supply chain disruptions. The impact of the investment in inventory was partially offset by increased accounts payable related to the inventory investment.
Investing Activities
CashConsistent with the prior year, cash used inby investing activities was lower for the three months ended September 30, 2021. In2022 was related to the prior year,premiums paid for company-owned life insurance policies on two of the Company had increased expenditures for a new operating system and leasehold improvements. During the fiscal year ending June 30, 2022, the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures of approximately $600,000.Company’s executives as well as some minor fixed asset expenditures. The Company expects to generatecurrently has sufficient cash flow from operations or from the use of itsand available cash and its credit facility to fund theseany necessary tooling, leasehold improvement and capital expenditures.
Financing Activities
Cash provided by financing activities is due entirely to stock option exercises. In the three months ended September 30, 2021,2022, an aggregate of 529,08932,000 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan. The cash provided from these stock option exercises was approximately $1.4 million. No$70,000. An aggregate of 529,089 shares of common stock options were exercisedissued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan in the three months ended September 30, 2020.2021. The cash provided from these stock option exercises was approximately $1,390,000.
As of September 30, 2021,2022, the Company had no outstanding borrowings on its bank line of credit facility.
There were no purchases of common stock in the quarters ended September 30, 20212022 or 2020September 30, 2021 under the stock repurchase program.
Liquidity
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 healthy cash reserves and available borrowings, provide it with adequate liquidity to meet operating requirements, debt service requirements and planned capital expenditures for the next twelve months following the date of this Quarterly Report on Form 10-Q 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 14, 2019, the Company entered into a secured credit facility ("(“Credit Agreement"Agreement”) with Town Bank (“Lender”). The Credit Agreement provides for a $5,000,000 revolving secured credit facility with an interest rate 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 $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 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. TheAs of September 30, 2022, the Company is currentlywas in compliance with all covenants related to the Credit Agreement. As of September 30, 2021,2022, and June 30, 2021,2022, there were no outstanding borrowings on the facility.
Contractual Obligation
The Company leases itsthe 126,000 square foot facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly-ownedcontrolled by five equal ownership interests in trusts held by the 5 beneficiaries of a former Chairman.Chairman’s revocable trust. On January 5, 2017,May 24, 2022, the lease was renewed for a period of five years, ending June 30, 2023,2028, 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 anyear. The Company has the option to renew at the same ratelease for an additional five years beginning July 1, 2028 and ending June 30, 2028.2033 under the same terms and conditions except that the annual rent will increase to $397,000. The negotiated increase in rent slated for 2028 will be the first increase in rent since 1996. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership. The facility is in good repair and, in the opinion of management, is suitable and adequate for the Company’s business purposes.
Off-Balance Sheet Transactions
At September 30, 2021,2022, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. 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 principal executive officer and principal financial officer, as appropriate 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 defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2021.2022. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as of September 30, 20212022 were effective.
Changes in Internal Control Over Financial Reporting
There have been no 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
From time-to-time, we may be involved in litigationAs part of its intellectual property enforcement program, on July 22, 2020 the Company brought patent infringement suits against each of Apple Inc., Bose Corporation, PEAG, LLC d/b/a jLab Audio, Plantronics, Inc. and Polycom, Inc., and Skullcandy, Inc., alleging infringement of the Company’s patents relating to claims arising out of our operationsits wireless headphone technology and seeking monetary relief and attorneys’ fees. The lawsuit against Apple, Inc. filed in the normal courseU.S. District Court in the Western District of business. DuringTexas on July 22, 2020 was dismissed on July 23, 2022 following resolution of the period covered by this report, there were no material changes to the descriptionlitigation between parties. The remaining lawsuits are pending in U.S. District Courts in District of legal proceedings set forth in Part I, Item 3Massachusetts (Bose Corporation), Southern District of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.California (PEAG, LLC), Northern District of California (Plantronics, Inc. and Polycom, Inc.), and District of Utah (Skullcandy, Inc.).
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed below and under Part 1. Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021,2022, as filed with the Securities and Exchange Commission on August 20, 2021.28, 2022. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this report. There have been no material changes to the risk factors described under “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. 2022.
Item 2. 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 three months ended September 30, 2021,2022, by the Company.
COMPANY REPURCHASES OF EQUITY SECURITIES
Total # of | Average | Total Number of Shares Purchased as | Approximate Dollar Value of | |||||||
July 1 - September 30, 2021 | — | $ | — | — | $ | 2,139,753 | ||||
Total # of | Average | Total Number of Shares Purchased as | Approximate Dollar Value of | |||||||
July 1 - July 31, 2022 | — | $ | — | — | $ | 2,139,753 | ||||
August 1 - August 31, 2022 | — | $ | — | — | $ | 2,139,753 | ||||
September 1 - September 30, 2022 | — | $ | — | — | $ | 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 September 30, 2021.2022.
Item 6. Exhibits
Exhibit No. | Exhibit Description |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
10.1 | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer * |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer * |
32.1 | |
32.2 | |
101 | The following financial information from Koss Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, |
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* 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 |
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/s/ Michael J. Koss | October | |
Michael J. Koss |
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Chairman |
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Chief Executive Officer |
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/s/ | October | |
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Chief Financial Officer |
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Principal Accounting Officer |
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