Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 for the quarterly period ended September 30, 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) 964-5000

 

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

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 ☑  No ☐

 

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 ☑  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 ☑

(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 ☐ No ☑

 

At November 8, 2019, there were 7,404,831 shares outstanding of the registrant’s common stock. 

 

1

 

 

KOSS CORPORATION

FORM 10-Q

September 30, 2019

 

INDEX

 

 

 

 

Page

 

 

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and June 30, 2019

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2019 and 2018

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended September 30, 2019 and 2018

5

 

 

 

 

 

    Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three Months Ended September 30, 2019 and 2018 6  
       

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

 

 

Item 2.

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

10

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

12

 

 

 

 

 

 

Item 4.

Controls and Procedures

12

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

13

 

 

 

 

 

 

Item 1A.

Risk Factors

13

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

13

 

 

 

 

 

 

Item 6.

Exhibits

14

 

 

2

 

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

KOSS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)

         
   

September 30, 2019

   

June 30, 2019*

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 1,329,487     $ 2,228,282  

Accounts receivable, less allowance for doubtful accounts of $5,201 and $2,617, respectively

    3,132,158       3,655,143  

Inventories, net

    6,858,779       6,851,448  

Prepaid expenses and other current assets

    231,036       133,889  

Income taxes receivable

    47,921       45,660  

Total current assets

    11,599,381       12,914,422  
                 

Equipment and leasehold improvements, net

    959,635       890,110  
                 

Other assets:

               
Deferred income taxes     9,957       13,276  

Operating lease right-of-use assets

    2,782,537       2,847,846  

Cash surrender value of life insurance

    6,827,133       6,569,628  

Total other assets

    9,619,627       9,430,750  
                 

Total assets

  $ 22,178,643     $ 23,235,282  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 572,178     $ 1,436,373  

Accrued liabilities

    711,615       650,513  

Deferred revenue

    616,688       645,470  

Operating lease liability

    268,274       265,443  

Total current liabilities

    2,168,755       2,997,799  
                 

Long-term liabilities:

               

Deferred compensation

    2,419,478       2,419,962  

Deferred revenue

    166,607       163,018  

Operating lease liability

    2,514,263       2,582,402  

Total long-term liabilities

    5,100,348       5,165,382  
                 

Total liabilities

    7,269,103       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

    6,481,323       6,333,135  

Retained earnings

    8,391,193       8,701,942  

Total stockholders' equity

    14,909,540       15,072,101  
                 

Total liabilities and stockholders' equity

  $ 22,178,643     $ 23,235,282  

 

*As adjusted for change in accounting principle (Note 2)

 

 

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

 

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KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

   

Three Months Ended

 
   

September 30

 
   

2019

   

2018*

 

Net sales

  $ 5,410,762     $ 5,784,839  

Cost of goods sold

    4,063,308       3,953,655  

Gross profit

    1,347,454       1,831,184  
                 

Selling, general and administrative expenses

    1,664,600       1,789,589  
                 

(Loss) income from operations

    (317,146 )     41,595  
                 

Interest income

    6,397       -  
                 

(Loss) income before income tax provision

    (310,749 )     41,595  
                 

Income tax provision

    -       25  
                 

Net (loss) income

  $ (310,749 )   $ 41,570  
                 

(Loss) income per common share:

               

Basic

  $ (0.04 )   $ 0.01  

Diluted

  $ (0.04 )   $ 0.01  
                 
Weighted-average number of shares:                
Basic     7,404,831       7,389,751  
Diluted     7,404,831       7,483,866  

 

*As adjusted for change in accounting principle (Note 2)

 

 

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

 

4

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KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   

Three Months Ended

 
   

September 30

 
   

2019

   

2018*

 

Operating activities:

               

Net (loss) income

  $ (310,749 )   $ 41,570  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for doubtful accounts

    2,584       42,938  

Depreciation of equipment and leasehold improvements

    94,357       125,748  

Stock-based compensation expense

    148,188       122,642  

Deferred income taxes

    3,319       -  

Change in cash surrender value of life insurance

    (144,872 )     (24,449 )

Change in deferred compensation accrual

    37,016       43,988  

Deferred compensation paid

    (37,500 )     (37,500 )
Net changes in operating assets and liabilities:                
Accounts receivable     520,401       1,079,739  
Inventories     (7,331 )     (258,008 )
Prepaid expenses and other current assets     (97,147 )     (115,685 )
Income taxes receivable     (2,261 )     25  
Accounts payable     (864,195 )     (296,892 )
Accrued liabilities     61,102       96,777  

Deferred revenue

    (25,193 )     (113,104 )

Net cash (used in) provided by operating activities

    (622,281 )     707,789  
                 

Investing activities:

               

Purchase of equipment and leasehold improvements

    (163,881 )     (14,790 )

Life insurance premiums paid

    (112,633 )     (122,754 )

Net cash (used in) investing activities

    (276,514 )     (137,544 )
                 

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

    (898,795 )     616,922  

Cash and cash equivalents at beginning of period

    2,228,282       1,081,533  

Cash and cash equivalents at end of period

  $ 1,329,487     $ 1,698,455  

 

*As adjusted for change in accounting principle (Note 2)

 

 

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

 

5

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KOSS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

   

Three Months Ended September 30, 2019

 
   

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)

    -       -       -       (310,749 )     (310,749 )

Stock-based compensation expense

    -       -       148,188       -       148,188  

Balance, September 30, 2019

    7,404,831     $ 37,024     $ 6,481,323     $ 8,391,193     $ 14,909,540  

 

 

   

Three Months Ended September 30, 2018

 
   

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

    -       -       -       41,570       41,570  

Stock-based compensation expense, as restated

    -       -       122,642       -       122,642  
Exercise of common stock options     22,125       110       46,567       -       46,677  

Balance, September 30, 2018

    7,404,831     $ 37,024     $ 5,940,096     $ 8,437,523     $ 14,414,643  

 

 

 

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

 

6

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KOSS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A)  BASIS OF PRESENTATION

 

The condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of operations for the three months ended September 30, 2019 and 2018, the condensed consolidated statements of cash flows for the three months ended September 30, 2019 and 2018 and the condensed consolidated statements of stockholders' equity for the three months ended September 30, 2019 and 2018, 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, 2019.

 

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 reserves, non-cash stock-based compensation and post-retirement obligations. Actual results could differ from the company's estimates.

 

B)   INCOME TAXES

 

A tax provision of $0 and $25 was recorded during the three months ended September 30, 2019 and 2018, respectively. Utilization of net operating tax carryforwards and use of bonus depreciation in conjunction with a full valuation allowance against deferred tax assets has reduced the income tax expense to zero.

 

 

 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 awards that would vest and subsequently 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 months ended September 30, 2018 was as follows:

 

           

Stock-Based

         

Statement of Operations

 

As Previously

   

Compensation

   

As

 

Three Months Ended September 30, 2018

 

Reported

   

Adjustment

   

Adjusted

 

Selling, general and administrative expenses

  $ 1,763,748     $ 25,841     $ 1,789,589  

Income from operations

    67,436       (25,841 )     41,595  

Net income

  $ 67,411     $ (25,841 )   $ 41,570  
                         

Income per common share

                       

Basic

  $ 0.01     $ -     $ 0.01  

Diluted

  $ 0.01     $ -     $ 0.01  

 

 

The impact of the change in principle on the Consolidated Statement of Cash Flows for the three months ended September 30, 2018 was as follows:

 

           

Stock-Based

         

Statement of Cash Flows

 

As Previously

   

Compensation

   

As

 

Three Months Ended September 30, 2018

 

Reported

   

Adjustment

   

Adjusted

 

Operating activities:

                       

Net income

  $ 67,411     $ (25,841 )   $ 41,570  

Stock-based compensation expense

  $ 96,801     $ 25,841     $ 122,642  

 

 

7

 

 

3.    INVENTORIES

 

The components of inventories were as follows:

 

   

September 30, 2019

   

June 30, 2019

 

Raw materials

  $ 1,871,103     $ 1,848,340  

Finished goods

    6,582,439       6,604,408  
Inventories, gross     8,453,542       8,452,748  

Reserve for obsolete inventory

    (1,594,763 )     (1,601,300 )

Inventories, net

  $ 6,858,779     $ 6,851,448  

 

 

4.    CREDIT FACILITY

 

On May 14, 2019, the Company entered into a secured credit facility ("Credit Agreement") with Town Bank (“Lender”) for a two-year term expiring on May 14, 2021. The Credit Agreement provides for an $5,000,000 revolving secured credit facility with 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 $1,000,000. There are no unused line fees in the credit facility. 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. The Company is currently in compliance with all covenants related to the Credit Agreement. As of September 30, 2019, and June 30, 2019, there were no outstanding borrowings on the facility. 

 

 

5.    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

 
   

2019

      2018  

United States

  $ 4,504,275     $ 3,770,884  

Export

    906,487       2,013,955  

Net Sales

  $ 5,410,762     $ 5,784,839  

 

 

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 $158,053 and $174,023 in the three months ended September 30, 2019 and 2018, respectively, for performance obligations related to consumer and customer warranties.  The deferred revenue liability was $859,370 and $746,267 as of June 30, 2018 and September 30, 2018, respectively.

 

 

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 September 30,

 
   

2019

   

2018*

 

Numerator

               

Net (loss) income

  $ (310,749 )   $ 41,570  
                 

Denominator

               

Weighted average shares, basic

    7,404,831       7,389,751  

Dilutive effect of stock compensation awards

    -       94,115  

Diluted shares

    7,404,831       7,483,866  
                 

Net (loss) income attributable to common shareholders per share:

               

Basic

  $ (0.04 )   $ 0.01  

Diluted

  $ (0.04 )   $ 0.01  

 

*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 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.

 

 

8.    LEGAL MATTERS

 

The Company is 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 not have a material adverse impact on the Consolidated Financial Statements, these matters are subject to inherent uncertainties and management's view of these matters may change in the future.

 

 

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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 “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.

 

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Item 2.

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 September 30, 2019, decreased $374,077 to $5,410,762, compared to the same quarter last year.   

 

Gross profit as a percent of sales decreased for the three months ended September 30, 2019 compared to the same quarter last year. The lower margin was primarily driven by change in the mix of business by product, customer and sales channel.

 

Selling, general and administrative expenses for the three months ended September 30, 2019, decreased compared to the same period in the prior year primarily due to a increase in cash surrender value income.

 

Tax expense for the three months ended September 30, 2019, was minimal due to an offsetting change in the valuation allowance for deferred tax assets.

 

Financial Results

 

The following table presents selected financial data for the three months ended September 30, 2019 and 2018:

 

   

Three Months Ended

 
   

September 30

 

Financial Performance Summary

 

2019

   

2018

 

Net sales

  $ 5,410,762     $ 5,784,839  

Net sales (decrease) %

    (6.5 )%     (4.9 )%

Gross profit

  $ 1,347,454     $ 1,831,184  

Gross profit as % of net sales

    24.9 %     31.7 %

Selling, general and administrative expenses

  $ 1,664,600     $ 1,789,589  

Selling, general and administrative expenses as % of net sales

    30.8 %     30.9 %

Interest income

  $ 6,397     $ -  

(Loss) income before income tax provision

  $ (310,749 )   $ 41,595  

(Loss) income before income tax as % of net sales

    (5.7 )%     0.7 %

Income tax provision

  $ -     $ 25  

Income tax provision as % of income before income tax

    0 %     0 %

 

2019 Results Compared with 2018

 

For the three months ended September 30, 2019, sales declined 6.5% due to a decrease in the export markets.  Sales in the domestic markets increased over the same period last year.

 

Export net sales decreased from approximately $2,014,000 to approximately $907,000 for the three months ended September 30, 2019 compared to last year.  This quarter last year included approximately $653,000 of net sales related to a contract that ended in December 2018.   Sales to a distributor based in Scandinavia declined approximately $376,000.  The decline in Scandinavia was driven by a loss of product placement and the recent strength of the US dollar.

 

Domestic net sales increased to approximately $4,504,000 in the three months ended September 30, 2019, from approximately $3,771,000 in the three months ended September 30, 2018. Increased sales to mass retail to support back-to-school promotions added approximately $410,000 and increased sales to a direct to consumer customer added another approximately $187,000.  The direct to consumer increase in sales was due to a custom product that began shipping late in the prior fiscal year.

 

Gross profit decreased to 24.9% for the three months ended September 30, 2019, compared to 31.7% for the three months ended September 30, 2018. The lower gross profit in the current year was largely due to change in mix by products and customers.  The increased net sales for the back-to-school promotion products are at lower margin than the decreased sales to the export markets.

 

Selling, general and administrative expenses for the three months ended September 30, 2019, decreased compared to the prior year. An increase of approximately $120,000 cash surrender value income was the most significant factor.  Bad debt expense declined by approximately $40,000 this year compared to last year when the bad debt for a domestic mass retail customer was recorded as a result of a Chapter 11 filing.   Legal fees increased by approximately $42,000 primarily due to continued efforts to protect and support our intellectual property portfolio.

 

Income tax expense for the three months ended September 30, 2019, was comprised of the U.S. federal statutory rate of 21% and the effect of state income taxes fully offset by an adjustment to the valuation allowance for deferred tax assets.

 

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.

 

 

10

Table of Contents

 

 

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, 2019 and 2018:

 

Total cash provided by (used in):

 

2019

   

2018

 

Operating activities

  $ (622,281 )   $ 707,789  

Investing activities

    (276,514 )     (137,544 )

Financing activities

    -       46,677  

Net (decrease) increase in cash and cash equivalents

  $ (898,795 )   $ 616,922  

 

Operating Activities

 

The decrease in accounts payable and the loss from operations were the driving factors for the decrease in cash provided by operating activities during the three months ended September 30, 2019.  There was significant inventory inbound to the U.S. from China as of June 30, 2019 that was paid for during the current quarter.  The impact of these factors was partially offset by a decrease in accounts receivable. 

  

Investing Activities

 

Cash used in investing activities was higher for the three months ended September 30, 2019, as the Company had increased expenditures for  leasehold improvements and for tooling related to new product introductions. During the fiscal year ending June 30, 2020, the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures of approximately $750,000  to $900,000.  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 September 30, 2019 and 2018, the Company had no outstanding borrowings on its bank line of credit facility.

 

There were no purchases of common stock in 2019 or 2018 under the stock repurchase program.  Cash provided in 2018 was from stock options exercised which resulted in the issuance of  22,125 shares of common stock. No stock options were exercised in 2019.

 

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 cash reserves and borrowings available under its credit facility, 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 14, 2019, the Company entered into a secured credit facility ("Credit Agreement") with Town Bank (“Lender”) for a two-year term expiring on May 14, 2021. The Credit Agreement provides for an $5,000,000 revolving secured credit facility with 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 $1,000,000. There are no unused line fees in the credit facility. 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. The Company is currently in compliance with all covenants related to the Credit Agreement. As of September 30, 2019, and June 30, 2019, there were no outstanding borrowings on the facility. 

 

11

Table of Contents

 

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 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 September 30, 2019.  The Company’s management has concluded that the Company’s disclosure controls and procedures as of September 30, 2019 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.

 

12

Table of Contents

 

PART II

OTHER INFORMATION

 

Item 1.

 Legal Proceedings

 

As of September 30, 2019, the Company is currently involved in legal matters that are described in Note 7 to the condensed consolidated financial statements, which description is incorporated herein by reference.

 

Item 1A.

Risk Factors

 

Not applicable.

 

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, 2019, 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

 

July 1 - September 30

    -     $ -       -     $ 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, 2019.

 

13

Table of Contents

 

Item 6.

Exhibits

 

Exhibit No.

Exhibit Description

 

 

18.1 Preferability Letter
   

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

Section 1350 Certification of Chief Executive Officer **

 

 

32.2

Section 1350 Certification of Chief Financial Officer **

 

 

101

The following financial information from Koss Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three months ended September 30, 2019 and 2018 (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended September 30, 2019 and 2018 , (iv) Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the three months ended September 30, 2019 and 2018 and (v) the Notes to Condensed Consolidated Financial Statements (Unaudited). *

 

__________________________

   

*

Filed herewith

**

Furnished herewith

 

14

Table of Contents

 

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

November 12, 2019

Michael J. Koss

 

Chairman

 

Chief Executive Officer

 

 

 

 

 

/s/ David D. Smith

November 12, 2019

David D. Smith

 

Chief Financial Officer

 

Principal Accounting Officer

 

 

 

 

15

ex_163787.htm

 

Exhibit 18.1—Preferability Letter

 

The Board of Directors

Koss Corporation and Subsidiary

Milwaukee, Wisconsin

 

 

We have been furnished with a copy of the quarterly report on Form 10-Q of Koss Corporation and Subsidiary (the Company) for the three months ended September 30, 2019 and have read the Company’s statements contained in note 2 to the consolidated financial statements included therein. As stated in note 2, the Company changed its method of recognizing stock-based compensation expense to account for forfeitures as they occur. Under the previous policy stock-based compensation expense was accounted for by applying an estimated forfeiture rate. The Company states the new policy of recognizing stock-based compensation expense is preferable because it better aligns with the number of awards that actually vest in a given period. In accordance with your request, we have reviewed and discussed with Company officials the circumstances, business judgment and planning upon which the decision to make this change in the method of accounting was based.

 

We have not audited any financial statements of the Company as of any date or for any period subsequent to June 30, 2019, nor have we audited the information set forth in the aforementioned note 2 to the consolidated financial statements; accordingly, we do not express an opinion concerning the factual information contained therein.

 

With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of the Company’s compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter.

 

Based on our review and discussion, with reliance on management’s business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company’s circumstances.

 

/s/ Wipfli LLP

 

Milwaukee, Wisconsin

November 12, 2019

ex_159015.htm

 

Exhibit 31.1

 

Certification of Chief Executive Officer 

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Michael J. Koss, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Koss Corporation;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the condensed financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its subsidiary, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

 

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Dated: November 12, 2019

 

 

 

/s/ Michael J. Koss

 

Michael J. Koss

 

Chairman and Chief Executive Officer

 

ex_159016.htm

 

Exhibit 31.2

 

Certification of Chief Financial Officer 

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, David D. Smith, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Koss Corporation;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the condensed financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its subsidiary, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

 

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Dated: November 12, 2019

 

 

 

/s/ David D. Smith

 

David D. Smith

 

Chief Financial Officer

 

ex_159017.htm

 

Exhibit 32.1

 

Certification of Chief Executive Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,

18 U.S.C. Section 1350

 

I, Michael J. Koss, Chief Executive Officer of Koss Corporation (the “Company”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that to my knowledge:

 

 

(i) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

 

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

/s/ Michael J. Koss

 

Michael J. Koss

 

Chairman and Chief Executive Officer

 

Dated: November 12, 2019

 

 

Note:  This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent required by the Sarbanes-Oxley Act of 2002, by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

ex_159018.htm

 

Exhibit 32.2

 

Certification of Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 

18 U.S.C. Section 1350

 

I, David D. Smith, Chief Financial Officer of Koss Corporation (the “Company”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that to my knowledge:

 

 

(i) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

 

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

/s/ David D. Smith

 

David D. Smith

 

Chief Financial Officer

 

Dated: November 12, 2019

 

 

Note:  This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent required by the Sarbanes-Oxley Act of 2002, by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

v3.19.3
Note 6 - (Loss) Income Per Common and Common Stock Equivalent Share (Tables)
3 Months Ended
Sep. 30, 2019
Notes Tables  
Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]
   
Three Months Ended September 30,
 
   
2019
   
2018*
 
Numerator
     
 
     
 
Net (loss) income
  $
(310,749
)   $
41,570
 
                 
Denominator
     
 
     
 
Weighted average shares, basic
   
7,404,831
     
7,389,751
 
Dilutive effect of stock compensation awards
   
-
     
94,115
 
Diluted shares
   
7,404,831
     
7,483,866
 
                 
Net (loss) income attributable to common shareholders per share:
               
Basic
  $
(0.04
)   $
0.01
 
Diluted
  $
(0.04
)   $
0.01
 
v3.19.3
Significant Accounting Policies (Policies)
3 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Basis of Accounting, Policy [Policy Text Block]
A)  BASIS OF PRESENTATION
 
The condensed consolidated balance sheet as of
September 30, 2019
, the condensed consolidated statements of operations for the 
three
months ended
September 30, 2019
and
2018
, the condensed consolidated statements of cash flows for the 
three
months ended
September 30, 2019
and
2018
and the condensed consolidated statements of stockholders' equity for the
three
months ended
September 30, 2019
and
2018
, 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, 2019
.
 
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 reserves, non-cash stock-based compensation and post-retirement obligations. Actual results could differ from the company's estimates.
Income Tax, Policy [Policy Text Block]
B)   INCOME TAXES
 
A tax provision of
$0
 
and 
$25
was recorded during the 
three
months ended
September 30, 2019
and
2018
, respectively. Utilization of net operating tax carryforwards and use of bonus depreciation in conjunction with a full valuation allowance against deferred tax assets has reduced the income tax expense to zero.
v3.19.3
Note 5 - Revenue Recognition
3 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
Revenue from Contract with Customer [Text Block]
5.
    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
 
   
2019
     
2018
 
United States
  $
4,504,275
    $
3,770,884
 
Export
   
906,487
     
2,013,955
 
Net Sales
  $
5,410,762
    $
5,784,839
 
 
 
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 
$158,053
 and 
$174,023
 in the 
three
months ended
September 30, 2019
and
2018
, respectively, for performance obligations related to consumer and customer warranties.  The deferred revenue liability was 
$859,370
 and 
$746,267
 as of 
June 30, 2018
 and 
September 30, 2018
, respectively.
v3.19.3
Document And Entity Information - shares
3 Months Ended
Sep. 30, 2019
Nov. 08, 2019
Document Information [Line Items]    
Entity Registrant Name KOSS CORP  
Entity Central Index Key 0000056701  
Trading Symbol koss  
Current Fiscal Year End Date --06-30  
Entity Filer Category Non-accelerated Filer  
Entity Current Reporting Status Yes  
Entity Emerging Growth Company false  
Entity Small Business true  
Entity Common Stock, Shares Outstanding (in shares)   7,404,831
Entity Shell Company false  
Document Type 10-Q  
Document Period End Date Sep. 30, 2019  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Title of 12(b) Security Common Stock  
v3.19.3
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
3 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Operating activities:    
Net (loss) income $ (310,749) $ 41,570 [1],[2],[3]
Adjustments to reconcile net income to net cash provided by operating activities:    
Provision for doubtful accounts 2,584 42,938 [2]
Depreciation of equipment and leasehold improvements 94,357 125,748 [2]
Stock-based compensation expense 148,188 122,642 [2]
Deferred income taxes 3,319 [2]
Change in cash surrender value of life insurance (144,872) (24,449) [2]
Change in deferred compensation accrual 37,016 43,988 [2]
Deferred compensation paid (37,500) (37,500) [2]
Net changes in operating assets and liabilities:    
Accounts receivable 520,401 1,079,739 [2]
Inventories (7,331) (258,008) [2]
Prepaid expenses and other current assets (97,147) (115,685) [2]
Income taxes receivable (2,261) 25 [2]
Accounts payable (864,195) (296,892) [2]
Accrued liabilities 61,102 96,777 [2]
Deferred revenue (25,193) (113,104) [2]
Net cash (used in) provided by operating activities (622,281) 707,789
Investing activities:    
Purchase of equipment and leasehold improvements (163,881) (14,790) [2]
Life insurance premiums paid (112,633) (122,754) [2]
Net cash (used in) investing activities (276,514) (137,544) [2]
Financing activities:    
Proceeds from exercise of stock options 46,677 [2]
Net cash provided by financing activities 46,677 [2]
Net (decrease) increase in cash and cash equivalents (898,795) 616,922 [2]
Cash and cash equivalents at beginning of period 2,228,282 [4] 1,081,533 [2]
Cash and cash equivalents at end of period $ 1,329,487 $ 1,698,455 [2]
[1] As adjusted for change in accounting principle (Note 2)
[2] As adjusted for change in accounting principle (Note 2)
[3] As adjusted for change in accounting principle (Note 2)
[4] As adjusted for change in accounting principle (Note 2)
v3.19.3
Note 3 - Inventories
3 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
Inventory Disclosure [Text Block]
3.
    INVENTORIES
 
The components of inventories were as follows:
 
   
September 30, 2019
   
June 30, 2019
 
Raw materials
  $
1,871,103
    $
1,848,340
 
Finished goods
   
6,582,439
     
6,604,408
 
Inventories, gross    
8,453,542
     
8,452,748
 
Reserve for obsolete inventory
   
(1,594,763
)    
(1,601,300
)
Inventories, net
  $
6,858,779
    $
6,851,448
 
v3.19.3
Note 7 - Leases (Details Textual)
3 Months Ended
Sep. 30, 2019
USD ($)
Lease Extension Per Year $ 380,000
Lessee, Operating Lease, Renewal Term 5 years
v3.19.3
Note 4 - Credit Facility (Details Textual) - Town Bank [Member] - Credit Agreement [Member] - USD ($)
May 14, 2019
Jun. 30, 2018
Debt Instrument, Term 2 years  
Line of Credit Facility, Unused Capacity, Commitment Fee Percentage 0.00%  
Long-term Line of Credit, Total $ 0 $ 0
Revolving Credit Facility [Member]    
Line of Credit Facility, Maximum Borrowing Capacity $ 5,000,000  
Revolving Credit Facility [Member] | London Interbank Offered Rate (LIBOR) [Member]    
Debt Instrument, Basis Spread on Variable Rate 1.50%  
Letter of Credit [Member]    
Line of Credit Facility, Maximum Borrowing Capacity $ 1,000,000  
v3.19.3
Note 2 - Change in Accounting Principle
3 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
New Accounting Pronouncements and Changes in Accounting Principles [Text Block]
 
2.
    CHANGE IN ACCOUNTING PRINCIPLE
 
During
t
he
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 awards that would vest and subsequently 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
months ended
September 30, 2018
 was as follows:
 
     
 
 
 
Stock-Based
     
 
 
Statement of Operations
 
As Previously
   
Compensation
   
As
 
Three Months Ended September 30, 2018
 
Reported
   
Adjustment
   
Adjusted
 
Selling, general and administrative expenses
  $
1,763,748
    $
25,841
    $
1,789,589
 
Income from operations
   
67,436
     
(25,841
)    
41,595
 
Net income
  $
67,411
    $
(25,841
)   $
41,570
 
                         
Income per common share
                       
Basic
  $
0.01
    $
-
    $
0.01
 
Diluted
  $
0.01
    $
-
    $
0.01
 
 
 
The impact of the change in principle on the Consolidated Statement of Cash Flows for the 
three
months ended
September 30, 2018
 was as follows:
 
     
 
 
 
Stock-Based
     
 
 
Statement of Cash Flows
 
As Previously
   
Compensation
   
As
 
Three Months Ended September 30, 2018
 
Reported
   
Adjustment
   
Adjusted
 
Operating activities:
                       
Net income
  $
67,411
    $
(25,841
)   $
41,570
 
Stock-based compensation expense
  $
96,801
    $
25,841
    $
122,642
 
 
v3.19.3
Condensed Consolidated Statements of Operations (Unaudited) - USD ($)
3 Months Ended
Sep. 30, 2019
Sep. 30, 2018
[1]
Net sales $ 5,410,762 $ 5,784,839
Cost of goods sold 4,063,308 3,953,655
Gross profit 1,347,454 1,831,184
Selling, general and administrative expenses 1,664,600 1,789,589
(Loss) income from operations (317,146) 41,595
Interest income 6,397
(Loss) income before income tax provision (310,749) 41,595
Income tax provision 0 25
Net (loss) income $ (310,749) $ 41,570 [2],[3]
(Loss) income per common share:    
Basic (in dollars per share) $ (0.04) $ 0.01 [2]
Diluted (in dollars per share) $ (0.04) $ 0.01 [2]
Weighted-average number of shares:    
Basic (in shares) 7,404,831 7,389,751 [2]
Diluted (in shares) 7,404,831 7,483,866 [2]
[1] As adjusted for change in accounting principle (Note 2)
[2] As adjusted for change in accounting principle (Note 2)
[3] As adjusted for change in accounting principle (Note 2)
v3.19.3
Note 6 - (Loss) Income Per Common and Common Stock Equivalent Share - Earning Per Share (Details) - USD ($)
3 Months Ended
Sep. 30, 2019
Sep. 30, 2018
[1]
Net (loss) income $ (310,749) $ 41,570 [2],[3]
Weighted average shares, basic (in shares) 7,404,831 7,389,751 [3]
Dilutive effect of stock compensation awards (in shares) 94,115
Diluted shares (in shares) 7,404,831 7,483,866 [3]
Basic (in dollars per share) $ (0.04) $ 0.01 [3]
Diluted (in dollars per share) $ (0.04) $ 0.01 [3]
[1] As adjusted for change in accounting principle (Note 2)
[2] As adjusted for change in accounting principle (Note 2)
[3] As adjusted for change in accounting principle (Note 2)
v3.19.3
Note 3 - Inventories - Components of Inventories (Details) - USD ($)
Sep. 30, 2019
Jun. 30, 2019
Raw materials $ 1,871,103 $ 1,848,340
Finished goods 6,582,439 6,604,408
Inventories, gross 8,453,542 8,452,748
Reserve for obsolete inventory (1,594,763) (1,601,300)
Inventories, net $ 6,858,779 $ 6,851,448 [1]
[1] As adjusted for change in accounting principle (Note 2)
v3.19.3
Note 8 - Legal Matters
3 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
Legal Matters and Contingencies [Text Block]
8.
    LEGAL MATTERS
 
The Company is 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
not
have a material adverse impact on the Consolidated Financial Statements, these matters are subject to inherent uncertainties and management's view of these matters
may
change in the future.
v3.19.3
Note 4 - Credit Facility
3 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
Debt Disclosure [Text Block]
4.
    CREDIT FACILITY
 
On
May 14, 2019,
the Company entered into a secured credit facility ("Credit Agreement") with Town Bank (“Lender”) for a
two
-year term expiring on
May 14, 2021.
The Credit Agreement provides for an
$5,000,000
revolving secured credit facility with 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
$1,000,000.
There are
no
unused line fees in the credit facility. 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. The Company is currently in compliance with all covenants related to the Credit Agreement. As of 
September 30, 2019
, and 
June 30, 2019
, there were
no
outstanding borrowings on the facility. 
v3.19.3
Note 5 - Revenue Recognition (Tables)
3 Months Ended
Sep. 30, 2019
Notes Tables  
Disaggregation of Revenue [Table Text Block]
   
Three Months Ended
 
   
September 30
 
   
2019
     
2018
 
United States
  $
4,504,275
    $
3,770,884
 
Export
   
906,487
     
2,013,955
 
Net Sales
  $
5,410,762
    $
5,784,839
 
v3.19.3
Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($)
Sep. 30, 2019
Jun. 30, 2019
[1]
Current assets:    
Cash and cash equivalents $ 1,329,487 $ 2,228,282
Accounts receivable, less allowance for doubtful accounts of $5,201 and $2,617, respectively 3,132,158 3,655,143
Inventories, net 6,858,779 6,851,448
Prepaid expenses and other current assets 231,036 133,889
Income taxes receivable 47,921 45,660
Total current assets 11,599,381 12,914,422
Equipment and leasehold improvements, net 959,635 890,110
Other assets:    
Deferred income taxes 9,957 13,276
Operating lease right-of-use assets 2,782,537 2,847,846
Cash surrender value of life insurance 6,827,133 6,569,628
Total other assets 9,619,627 9,430,750
Total assets 22,178,643 23,235,282
Current liabilities:    
Accounts payable 572,178 1,436,373
Accrued liabilities 711,615 650,513
Deferred revenue 616,688 645,470
Operating lease liability 268,274 265,443
Total current liabilities 2,168,755 2,997,799
Long-term liabilities:    
Deferred compensation 2,419,478 2,419,962
Deferred revenue 166,607 163,018
Operating lease liability 2,514,263 2,582,402
Total long-term liabilities 5,100,348 5,165,382
Total liabilities 7,269,103 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 6,481,323 6,333,135
Retained earnings 8,391,193 8,701,942
Total stockholders' equity 14,909,540 15,072,101
Total liabilities and stockholders' equity $ 22,178,643 $ 23,235,282
[1] As adjusted for change in accounting principle (Note 2)
v3.19.3
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($)
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Total
Balance, as originally stated (in shares) at Jun. 30, 2018 7,382,706      
Balance, as originally stated at Jun. 30, 2018 $ 36,914 $ 5,752,270 $ 8,414,570 $ 14,203,754
Retrospective change in accounting principle (see Note 2) at Jun. 30, 2018 18,617 (18,617)
Adjusted Balance at Jun. 30, 2018 36,914 5,770,887 8,395,953 14,203,754
Net (loss) income 41,570 41,570 [1],[2],[3]
Stock-based compensation expense 122,642 122,642
Exercise of common stock options (in shares) 22,125      
Exercise of common stock options $ 110 46,567 46,677
Balance (in shares) at Sep. 30, 2018 7,404,831      
Balance at Sep. 30, 2018 $ 37,024 5,940,096 8,437,523 $ 14,414,643
Balance, as originally stated (in shares) at Jun. 30, 2019 7,404,831     7,404,831
Balance, as originally stated at Jun. 30, 2019 $ 37,024 6,186,393 8,848,684 $ 15,072,101 [4]
Retrospective change in accounting principle (see Note 2) at Jun. 30, 2019 146,742 (146,742)
Adjusted Balance at Jun. 30, 2019 37,024 6,333,135 8,701,942 15,072,101
Net (loss) income (310,749) (310,749)
Stock-based compensation expense 148,188 $ 148,188
Balance (in shares) at Sep. 30, 2019 7,404,831     7,404,831
Balance at Sep. 30, 2019 $ 37,024 $ 6,481,323 $ 8,391,193 $ 14,909,540
[1] As adjusted for change in accounting principle (Note 2)
[2] As adjusted for change in accounting principle (Note 2)
[3] As adjusted for change in accounting principle (Note 2)
[4] As adjusted for change in accounting principle (Note 2)
v3.19.3
Note 5 - Revenue Recognition (Details Textual) - USD ($)
3 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Jun. 30, 2018
Contract with Customer, Liability, Revenue Recognized $ 158,053 $ 174,023  
Contract with Customer, Liability, Total   $ 746,267 $ 859,370
v3.19.3
Note 1 - Summary of Significant Accounting Policies (Details Textual) - USD ($)
3 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Income Tax Expense (Benefit), Total $ 0 $ 25 [1]
[1] As adjusted for change in accounting principle (Note 2)
v3.19.3
Note 2 - Change in Accounting Principle (Tables)
3 Months Ended
Sep. 30, 2019
Notes Tables  
Schedule of New Accounting Pronouncements and Changes in Accounting Principles [Table Text Block]
     
 
 
 
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
 
     
 
 
 
Stock-Based
     
 
 
Statement of Operations
 
As Previously
   
Compensation
   
As
 
Three Months Ended September 30, 2018
 
Reported
   
Adjustment
   
Adjusted
 
Selling, general and administrative expenses
  $
1,763,748
    $
25,841
    $
1,789,589
 
Income from operations
   
67,436
     
(25,841
)    
41,595
 
Net income
  $
67,411
    $
(25,841
)   $
41,570
 
                         
Income per common share
                       
Basic
  $
0.01
    $
-
    $
0.01
 
Diluted
  $
0.01
    $
-
    $
0.01
 
     
 
 
 
Stock-Based
     
 
 
Statement of Cash Flows
 
As Previously
   
Compensation
   
As
 
Three Months Ended September 30, 2018
 
Reported
   
Adjustment
   
Adjusted
 
Operating activities:
                       
Net income
  $
67,411
    $
(25,841
)   $
41,570
 
Stock-based compensation expense
  $
96,801
    $
25,841
    $
122,642
 
v3.19.3
Note 6 - (Loss) Income Per Common and Common Stock Equivalent Share
3 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
Earnings Per Share [Text Block]
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 September 30,
 
   
2019
   
2018*
 
Numerator
     
 
     
 
Net (loss) income
  $
(310,749
)   $
41,570
 
                 
Denominator
     
 
     
 
Weighted average shares, basic
   
7,404,831
     
7,389,751
 
Dilutive effect of stock compensation awards
   
-
     
94,115
 
Diluted shares
   
7,404,831
     
7,483,866
 
                 
Net (loss) income attributable to common shareholders per share:
               
Basic
  $
(0.04
)   $
0.01
 
Diluted
  $
(0.04
)   $
0.01
 
 
*As adjusted for change in accounting principle (Note
2
)
v3.19.3
Note 3 - Inventories (Tables)
3 Months Ended
Sep. 30, 2019
Notes Tables  
Schedule of Inventory, Current [Table Text Block]
   
September 30, 2019
   
June 30, 2019
 
Raw materials
  $
1,871,103
    $
1,848,340
 
Finished goods
   
6,582,439
     
6,604,408
 
Inventories, gross    
8,453,542
     
8,452,748
 
Reserve for obsolete inventory
   
(1,594,763
)    
(1,601,300
)
Inventories, net
  $
6,858,779
    $
6,851,448
 
v3.19.3
Note 7 - Leases
3 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
Lessee, Operating Leases [Text Block]
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 
$380,000
per year and included an option to renew at the same rate for an additional
five
years ending
June 30, 2028
.  The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership.
v3.19.3
Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($)
Sep. 30, 2019
Jun. 30, 2019
Accounts receivable, allowance for doubtful accounts $ 5,201 $ 2,617 [1]
Common stock, par value (in dollars per share) $ 0.005 $ 0.005
Common stock, shares authorized (in shares) 20,000,000 20,000,000
Common stock, shares issued (in shares) 7,404,831 7,404,831
Common stock, shares outstanding (in shares) 7,404,831 7,404,831
[1] As adjusted for change in accounting principle (Note 2)
v3.19.3
Note 1 - Summary of Significant Accounting Policies
3 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
Significant Accounting Policies [Text Block]
1.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
A)  BASIS OF PRESENTATION
 
The condensed consolidated balance sheet as of
September 30, 2019
, the condensed consolidated statements of operations for the 
three
months ended
September 30, 2019
and
2018
, the condensed consolidated statements of cash flows for the 
three
months ended
September 30, 2019
and
2018
and the condensed consolidated statements of stockholders' equity for the
three
months ended
September 30, 2019
and
2018
, 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, 2019
.
 
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 reserves, non-cash stock-based compensation and post-retirement obligations. Actual results could differ from the company's estimates.
 
B)   INCOME TAXES
 
A tax provision of
$0
 
and 
$25
was recorded during the 
three
months ended
September 30, 2019
and
2018
, respectively. Utilization of net operating tax carryforwards and use of bonus depreciation in conjunction with a full valuation allowance against deferred tax assets has reduced the income tax expense to zero.
v3.19.3
Note 5 - Revenue Recognition - Disaggregation of Revenue (Details) - USD ($)
3 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Net Sales $ 5,410,762 $ 5,784,839 [1]
UNITED STATES    
Net Sales 4,504,275 3,770,884
Non-US [Member]    
Net Sales $ 906,487 $ 2,013,955
[1] As adjusted for change in accounting principle (Note 2)
v3.19.3
Note 2 - Change in Accounting Principle - Cumulative Effect of Changes for Adoption of New Accounting Standard (Details) - USD ($)
3 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Jun. 30, 2019
Paid in capital     $ 6,333,135
Retained earnings $ 8,391,193   8,701,942 [1]
Selling, general and administrative expenses 1,664,600 $ 1,789,589 [2]  
Income from operations (317,146) 41,595 [2]  
Net (loss) income $ (310,749) $ 41,570 [2],[3],[4]  
Basic (in dollars per share) $ (0.04) $ 0.01 [2],[3]  
Diluted (in dollars per share) $ (0.04) $ 0.01 [2],[3]  
Stock-based compensation expense $ 148,188 $ 122,642 [4]  
Accounting Standards Update 2016-09 [Member] | Previously Reported [Member]      
Paid in capital     6,186,393
Retained earnings     8,848,684
Selling, general and administrative expenses   1,763,748  
Income from operations   67,436  
Net (loss) income   $ 67,411  
Basic (in dollars per share)   $ 0.01  
Diluted (in dollars per share)   $ 0.01  
Stock-based compensation expense   $ 96,801  
Accounting Standards Update 2016-09 [Member] | Restatement Adjustment [Member]      
Paid in capital     146,742
Retained earnings     $ (146,742)
Selling, general and administrative expenses   25,841  
Income from operations   (25,841)  
Net (loss) income   $ (25,841)  
Basic (in dollars per share)    
Diluted (in dollars per share)    
Stock-based compensation expense   $ 25,841  
[1] As adjusted for change in accounting principle (Note 2)
[2] As adjusted for change in accounting principle (Note 2)
[3] As adjusted for change in accounting principle (Note 2)
[4] As adjusted for change in accounting principle (Note 2)