KOSS CORP 10-Q

Item 1. Financial Statements KOSS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, 2021 June 30, 2021 ASSETS Current assets: Cash and cash equivalents $ 7,233,248 $ 6,950,215 Accounts receivable, less allowance for doubtful accounts of $ 41,980 and $ 41,499 , respectively 2,119,718 2,240,785 Inventories, net 7,292,203 5,901,512 Prepaid expenses and other current assets 650,091 456,004 Total current assets 17,295,260 15,548,516 Equipment and leasehold improvements, net 1,257,936 1,281,180 Other assets: Operating lease right-of-use assets 2,234,363 2,305,455 Cash surrender value of life insurance 7,451,804 7,188,994 Total other assets 9,686,167 9,494,449 Total assets $ 28,239,363 $ 26,324,145 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,022,945 $ 398,433 Accrued liabilities 653,906 665,567 Deferred revenue 616,602 694,632 Operating lease liability 292,030 288,949 Income taxes payable 5,574 4,543 Total current liabilities 2,591,057 2,052,124 Long-term liabilities: Deferred compensation 2,542,792 2,491,482 Deferred revenue 184,517 188,932 Operating lease liability 1,942,333 2,016,506 Total long-term liabilities 4,669,642 4,696,920 Total liabilities 7,260,699 6,749,044 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 Paid in capital 12,302,395 10,802,118 Retained earnings 8,630,580 8,729,939 Total stockholders' equity 20,978,664 19,575,101 Total liabilities and stockholders' equity $ 28,239,363 $ 26,324,145 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 3 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended September 30 2021 2020 Net sales $ 4,365,067 $ 5,208,295 Cost of goods sold 2,783,230 3,572,067 Gross profit 1,581,837 1,636,228 Selling, general and administrative expenses 1,780,798 1,505,772 (Loss) income from operations ( 198,961 ) 130,456 Other income 100,000 — Interest income (expense) 633 ( 2,051 ) (Loss) income before income tax provision ( 98,328 ) 128,405 Income tax provision 1,031 1,477 Net (loss) income $ ( 99,359 ) $ 126,928 (Loss) income per common share: Basic $ ( 0.01 ) $ 0.02 Diluted $ ( 0.01 ) $ 0.02 Weighted-average number of shares: Basic 8,843,946 7,404,831 Diluted 8,843,946 7,408,685 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 4 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended September 30 2021 2020 Operating activities: Net (loss) income $ ( 99,359 ) $ 126,928 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Provision for doubtful accounts of accounts receivable 480 10,698 Depreciation of equipment and leasehold improvements 80,438 74,278 Stock-based compensation expense 138,876 152,994 Change in cash surrender value of life insurance ( 167,084 ) ( 157,285 ) Provision for deferred compensation 88,810 21,000 Deferred compensation paid ( 37,500 ) ( 37,500 ) Net changes in operating assets and liabilities: Accounts receivable 120,587 ( 922,662 ) Inventories ( 1,390,691 ) 241,541 Prepaid expenses and other current assets ( 194,087 ) ( 200,115 ) Income taxes receivable — 1,479 Income taxes payable 1,031 — Accounts payable 624,512 111,250 Accrued liabilities ( 11,661 ) 269,335 Deferred revenue ( 82,445 ) 127,159 Net cash (used in) operating activities ( 928,093 ) ( 180,900 ) Investing activities: Purchase of equipment and leasehold improvements ( 57,194 ) ( 264,996 ) Life insurance premiums paid ( 95,726 ) ( 103,568 ) Net cash (used in) investing activities ( 152,920 ) ( 368,564 ) Financing activities: Proceeds from exercise of stock options 1,364,046 — Net cash provided by financing activities 1,364,046 — Net increase (decrease) in cash and cash equivalents 283,033 ( 549,464 ) Cash and cash equivalents at beginning of period 6,950,215 3,999,409 Cash and cash equivalents at end of period $ 7,233,248 $ 3,449,945 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 5 Table of Contents 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, 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 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 6 Table of Contents KOSS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2021 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) BASIS OF PRESENTATION The condensed consolidated balance sheets as of September 30, 2021 and June 30, 2021, the condensed consolidated statements of operations for the three months ended September 30, 2021 and 2020, the condensed consolidated statements of cash flows for the three months ended September 30, 2021 and 2020, and the condensed consolidated statements of stockholders' equity for the three months ended September 30, 2021 and 2020, have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and have not been audited. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The operating results for any interim period are not necessarily indicative of the operating results that may be experienced for the full fiscal year. Certain information and footnote disclosure normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021. The preparation of financial statements in conformity with U.S. GAAP requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, income tax valuation allowance , non-cash stock-based compensation and deferred compensation. Actual results could differ from the Company's estimates. B) INCOME TAXES A state tax provision of $ 1,031 and $ 1,477 was recorded for the three months ended September 30, 2021 and 2020, respectively. The federal income tax expense was zero for the three months ended September 30, 2021 and 2020. In the three months ended September 30, 2021, stock option exercises resulted in tax deductible compensation expense of approximately $ 7,800,000 . The deduction of this stock option exercise compensation expense will cause a tax loss in the year ended June 30, 2022, which will be carried forward to future tax years. The expected tax loss carryforward, including the stock-based compensation expense deductions in the three months ended September 30, 2021, will be approximately $ 39,900,000 . The additional estimated tax loss carryforward increased the deferred tax asset to approximately $ 12,100,000 as of September 30, 2021, and the future realization of this is uncertain. The valuation allowance was increased to fully offset the deferred tax asset. C) OTHER INCOME In July 2021, the Company entered into a license agreement with a headphone manufacturer (whereby the manufacturer licensed the use of certain patents in certain of their headphones). The one-time license fee of $ 100,000 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. ‎ 7 Table of Contents 2. INVENTORIES The components of inventories were as follows: September 30, 2021 June 30, 2021 Raw materials $ 2,147,199 $ 2,067,572 Finished goods 6,885,788 5,621,228 Inventories, gross 9,032,987 7,688,800 Reserve for obsolete inventory ( 1,740,784 ) ( 1,787,288 ) Inventories, net $ 7,292,203 $ 5,901,512 3. CREDIT FACILITY AND SBA LOAN On May 14, 2019, the Company entered into a secured credit facility ("Credit Agreement") with Town Bank (“Lender”). The Credit Agreement provides for a $ 5,000,000 revolving secured credit facility 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 %. 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, the Company was in compliance with all covenants related to the Credit Agreement. As of September 30, 2021, and June 30, 2021, there were no outstanding borrowings on the facility. On April 13, 2020, the Company received an unsecured loan (the "SBA Loan") for $ 506,700 under the Small Business Administration ("SBA") Paycheck Protection Program (the “PPP”) of the CARES Act through Town Bank. On November 3, 2020, the Company was notified that the full principal amount of $ 506,700 had been forgiven and was recorded as other income in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021. 4. REVENUE RECOGNITION The Company disaggregates it's 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 September 30, 2021 2020 United States $ 2,787,519 $ 3,939,077 Export 1,577,548 1,269,218 Net Sales $ 4,365,067 $ 5,208,295 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. The Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $ 153,221 and $ 111,030 in the three months ended September 30, 2021 and 2020, respectively, for performance obligations related to consumer and customer warranties. The deferred revenue liability was $ 593,920 as of June 30, 2020. 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. ‎ 8 Table of Contents 5. (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 (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 (loss) income per share: Three Months Ended September 30, 2021 2020 Numerator Net (loss) income $ ( 99,359 ) $ 126,928 Denominator Weighted average shares, basic 8,843,946 7,404,831 Dilutive effect of stock compensation awards (1) — 3,854 Diluted shares 8,843,946 7,408,685 Net (loss) income attributable to common shareholders per share: Basic $ ( 0.01 ) $ 0.02 Diluted $ ( 0.01 ) $ 0.02 (1) Excludes approximately 1,500,528 and 2,750,176 weighted average stock options for the three months ended September 30, 2021 and 2020, respectively, as the impact of such awards was anti-dilutive. 6. RELATED PARTY LEASE 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. 7. ACCOUNTS RECEIVABLE CONCENTRATIONS As of September 30, 2021 the Company’s top three accounts receivable customers represented approximately 28 %, 18 %, and 13 % of trade accounts receivables. These same customers represented approximately 19 %, 0 %, and 24 % of trade accounts receivable at June 30, 2021. 8. LEGAL MATTERS As of September 30, 2021, the Company is involved in the matters described below: • In July 2020, 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 allege 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 to incur additional fees and costs related to these lawsuits that will have a material impact to its financial statements. 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. • Early in fiscal year 2020, the Company was notified by One E-Way, Inc. that some of the Company's wireless products may infringe on certain One E-Way patents. No lawsuits involving these allegations have yet been filed and served on the Company. The ultimate resolution of these matters is not determinable unless otherwise noted. We 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 aggregate, will not have a material adverse impact on our Condensed Consolidated Financial Statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. ‎ 9 Table of Contents CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 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 “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 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, 2021 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. ‎ 10 Table of Contents