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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2020
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
(State or other jurisdiction of incorporation or organization)
4129 North Port Washington Avenue, Milwaukee, Wisconsin
(Address of principal executive offices)
Registrant’s telephone number, including area code: (414) 964-5000
Securities registered pursuant to Section 12(b) of the Act:
39-1168275
(I.R.S. Employer Identification No.)
53212
(Zip Code)
Title of Each Class
Common Stock par value $0.05 per share
Trading Symbol(s)
KOSS
Name of Each Exchange on Which Registered
Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
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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 ☐
Non-accelerated filer ☒
Accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common stock held by nonaffiliates of the registrant as of December 31, 2019, was approximately $4,994,914 (based on
the $1.54 per share closing price of the Company’s common stock as reported on the NASDAQ Stock Market on December 31, 2019).
On August 17, 2020, there were 7,404,831 shares outstanding of the registrant’s common stock.
Documents Incorporated by Reference
Part III of this Form 10-K incorporates by reference information from Koss Corporation’s Proxy Statement for its 2020 Annual Meeting of Stockholders
filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.
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KOSS CORPORATION
FORM 10-K
For the Fiscal Year Ended June 30, 2020
INDEX
Business
PART I
Item 1.
Item 1A Risk Factors
Item 2.
Item 3.
Properties
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
PART IV
Item 15. Exhibits and Financial Statement Schedules
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5
8
11
11
12
13
18
18
18
14
19
19
19
19
19
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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-K 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-K, the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "may," "will," "should," “could,” “would,” “shall,” "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-K, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this
Form 10-K, 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations sections in
this Form 10-K 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.
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ITEM 1.
BUSINESS.
GENERAL
PART I
As used herein unless the context otherwise requires, the term “Company” means Koss Corporation and its subsidiaries, Koss Corp B.V. and Koss U.K.
Limited. The Company formed Koss Corp B.V. and Koss U.K. Limited to comply with certain European Union ("EU") requirements. The subsidiaries
are non-operating and hold no assets. The Company was incorporated in Delaware in 1971.
The Company operates in the audio/video industry segment of the home entertainment industry through its design, manufacture and sale of stereo
headphones and related accessory products. The Company reports its results as a single reporting segment, as the Company’s principal business line is the
design, manufacture and sale of stereo headphones and related accessories.
The Company’s products are sold through national retailers, U.S. distributors, international distributors, audio specialty stores, the internet, direct mail
catalogs, regional department store chains, discount department stores, grocery stores, electronics retailers, military exchanges and prisons under the
“Koss” name as well as private label. The Company also sells products to distributors for resale to school systems, and directly to other manufacturers for
inclusion with their own products. The Company has approximately 113 domestic dealers and its products are carried in approximately 7,696 domestic
retail outlets and numerous retailers worldwide. International markets are served by domestic sales representatives and sales personnel in the Netherlands
and Russia. The Company utilizes independent distributors in several foreign countries.
Approximately 75% of the Company’s fiscal year 2020 sales were from stereo headphones used for listening to music. The remaining 25% of the
Company's sales were from headphones used in communications, education settings, and in conjunction with metal detectors, as well as to original
equipment manufacturers ("OEM"). The products are not significantly differentiated by their retail sales channel or application with the exception of
products sold to school systems, prisons, and OEM customers. There are no other product line differentiations other than the quality of the sound produced
by the stereo headphone itself, which is highly subjective.
The Company sources complete stereo headphones manufactured to its specifications from various manufacturers in Asia as well as raw materials used to
produce stereo headphones at its plant in Milwaukee, Wisconsin. Management believes that it has sources of complete stereo headphones and raw materials
that are adequate for its needs.
There are no employment or compensation commitments between the Company and its dealers. The Company has several independent manufacturers’
representatives as part of its distribution efforts. The Company typically signs one year contracts with these manufacturers’ representatives. The
arrangements with foreign distributors do not contemplate that the Company pays any compensation other than any profit the distributors make upon their
sale of the Company’s products.
INTELLECTUAL PROPERTY
John C. Koss is recognized for creating the stereo headphone industry with the first SP/3 stereo headphone in 1958. The Company regularly applies for
registration of its trademarks in many countries around the world, and over the years the Company has had numerous trademarks registered and patents
issued in North America, South America, Asia, Europe, Africa, and Australia. The Company currently has 433 trademarks registered in 91 countries
around the world and 142 patents in 24 countries. The Company has trademarks to protect the brand name, Koss, and its logo on its products. The
Company also holds many design patents that protect the unique visual appearance of some of its products. These trademarks and patents are important to
differentiate the Company from its competitors. Certain of the Company’s trademarks are of material value and importance to the conduct of its business.
The Company considers protection of its proprietary developments important; however, the Company’s business is not, in the opinion of management,
materially dependent upon any single trademark or patent.
SEASONALITY
Although retail sales of consumer electronics have typically been higher during the holiday season, stereo headphones have also seen increased purchases
throughout the year. Management believes that the Company's business and industry segment are no longer seasonal as evidenced by the fact that net sales
for the last couple of years, including the year ended June 30, 2020, were almost equally split between the first and second halves of the year. Management
believes that the reason for this level performance of sales to retailers and distributors is related to the fact that consumers are increasingly purchasing
stereo headphones throughout the year as replacements for older or lower quality headphones to improve the quality of their listening experience as it
relates to portable electronic products. Therefore, upgrades and replacements appear to have as much interest over the course of the year as gifts of stereo
headphones during the holiday season.
WORKING CAPITAL AND BACKLOG
The Company’s working capital needs do not differ substantially from those of its competitors in the industry and generally reflect the need to carry
significant amounts of inventory to meet delivery requirements of its customers. From time to time, although rarely, the Company may extend payment
terms to its customers for a special promotion. For instance, the Company has in the past offered a 90-120 day payment period for certain customers, such
as computer retailers and office supply stores. Based on historical trends, management does not expect these practices to have a material effect on net sales
or net income. The Company’s backlog of orders as of June 30, 2020, is not significant in relation to net sales during fiscal year 2020 or projected fiscal
year 2021 net sales.
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CUSTOMERS
The Company markets a line of products used by consumers to listen to music, sound bytes on computer systems, and other audio related media. The
Company distributes these products through retail channels in the U.S. and independent distributors throughout the rest of the world. Additionally, the
Company fills direct-to-consumer orders on its website. The Company markets its products through approximately 7,696 domestic retail outlets and
numerous retailers worldwide. The Company also markets products directly to several original equipment manufacturers for use in their products. Sales to
this customer base have been growing in recent years. The Company’s sales to its largest single customer, Wal-Mart, were approximately 18% and 18% of
net sales in fiscal year 2020 and 2019, respectively. The Company is dependent upon its ability to retain a base of retailers and distributors to sell the
Company’s line of products. Loss of retailers and distributors means loss of product placement. The Company has broad distribution across many
channels including specialty stores, mass merchants, and electronics stores. Management believes that any loss of revenues would be partially offset by a
corresponding decrease, on a percentage basis, in expenses, thereby partially reducing the impact on the Company’s income from operations. The five
largest customers of the Company (including Wal-Mart in both years) accounted for approximately 48% and 47% of net sales in fiscal years 2020 and
2019, respectively.
COMPETITION
The Company focuses on the stereo headphone industry. In the stereo headphone market, the Company competes directly with approximately six major
competitors, several of which are large and diversified and have greater total assets and resources than the Company. The extent to which retailers and
consumers view the Company as an innovative vendor of high quality stereo headphone products, and a provider of excellent after-sales customer service,
is the extent to which the Company maintains a competitive advantage. The Company relies upon its unique sound, quality workmanship, brand
identification, engineering skills, and customer service to maintain its competitive position.
RESEARCH AND DEVELOPMENT
The amount expensed on engineering and research activities relating to the development of new products or the improvement of existing products
was $397,360 during fiscal year 2020. These activities were conducted by both Company personnel and outside consultants. There was $334,789 in
expenses for research and development activities during fiscal year 2019. The Company expects to incur research and development costs related to its
Bluetooth® and traditional wired headphones during fiscal year 2021 as it is planning to introduce several new product offerings.
ENVIRONMENTAL MATTERS
The Company believes that it has materially complied with all currently existing federal, state and local statutes and regulations regarding environmental
standards and occupational safety and health matters to which it is subject. During fiscal years 2020 and 2019, the amounts incurred in complying with
federal, state and local statutes and regulations pertaining to environmental standards and occupational safety and health laws and regulations did not
materially affect the Company’s operating results or financial condition.
EMPLOYEES
As of June 30, 2020, the Company employed 34 non-union employees, 3 of which were part-time employees. The Company also engaged temporary
personnel at times during the year ended June 30, 2020.
FOREIGN SALES
The Company’s competitive position and risks relating to its business in foreign markets are comparable to those in the domestic market. In addition, the
governments of foreign nations may elect to erect trade barriers on imports. The creation of additional barriers would reduce the Company’s net sales and
net income. In addition, any fluctuations in currency exchange rates could affect the pricing of the Company’s products and divert customers who might
choose to purchase lower-priced, less profitable products, and could affect overall demand for the Company’s products. For further information, see
Part II, Item 7.
The Company has sales personnel in the Netherlands and Russia to service the international export marketplace. Loss of these personnel would result in a
transfer of sales and marketing responsibility. The Company sells its products to independent distributors in countries and regions outside the United States
including Europe, the Middle East, Africa, Asia, Australia, South America, Latin America, the Caribbean, Canada and Mexico. During the last two fiscal
years, net sales of all Koss products were distributed as follows:
United States
Sweden
Czech Republic
Russian Federation
Canada
Malaysia
Australia
All other countries
Net sales
2020
15,161,311 $
609,701
584,694
459,136
362,103
291,369
281,094
562,422
18,311,830 $
$
$
2019
15,255,741
1,841,402
1,208,893
459,035
343,576
235,636
415,080
2,082,734
21,842,097
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OPERATIONS
The Company has a manufacturing facility in Milwaukee, Wisconsin. The Company uses contract manufacturing facilities in the People's Republic of
China and Taiwan. Since these independent suppliers are not located in the United States, the Company is at risk of business interruptions due to natural
disasters, war, disease and government intervention through tariffs or trade restrictions that are of less concern domestically. The Company maintains
finished goods inventory in its U.S. facility to mitigate this risk. The Company’s goal is to stock finished goods inventory at an average of approximately
90 days demand per item. Recovery of a single facility through replacement of a supplier in the event of a disaster or suspension of supply could take six
to twelve months. The Company believes that it could restore production of its top 10 selling models (which represent approximately 64% of the
Company’s 2020 net sales) within 12-18 months. Recent changes to compliance testing have impacted the time it takes to bring a product to market and
would also impact the time necessary to retool a product and re-enter the marketplace. The Company is also at risk if trade restrictions are introduced on its
products based upon country of origin. In addition, the Company may not be able to pass along most increases in tariffs and freight charges to the
Company’s customers, which would directly affect profits.
CYBERSECURITY
The Company depends on information technology as an enabler to improve the effectiveness of its operations and to interface with its customers, as well as
to maintain financial accuracy and efficiency. Information technology system failures, including suppliers’ or vendors’ system failures, could disrupt the
Company’s operations by causing transaction errors, processing inefficiencies, delays or cancellation of customer orders, the loss of customers,
impediments to the manufacture or shipment of products, other business disruptions, or the loss of or damage to intellectual property through security
breach. The Company’s information systems, or those of its third-party service providers, could also be penetrated by outside parties intent on extracting
information, corrupting information or disrupting business processes. Such unauthorized access could disrupt the Company’s business, increase costs
and/or could result in the loss of assets. Cybersecurity attacks are becoming more sophisticated and include, but are not limited to, malicious software,
attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of
confidential or otherwise protected information, corruption or destruction of data and other manipulation or improper use of systems or networks. These
events could negatively impact the Company’s customers and/or reputation and lead to financial losses from remediation actions, loss of business,
production downtimes, operational delays or potential liability, penalties, fines or other increases in expense, all of which may have a material adverse
effect on the Company’s business. In addition, as security threats and cybersecurity and data privacy and protection laws and regulations continue to evolve
and increase in terms of sophistication, we may invest additional resources in the security of our systems. Any such increased level of investment could
adversely affect our financial condition or results of operations. The Company has programs in place to address and mitigate the cybersecurity risks.
These programs include regular monitoring of outside threats, continuous updating of software to mitigate risk, education of employees to the risks of
external threats, and simplification of infrastructure to minimize servers. The Company continues to minimize its risk by reducing the number of physical
servers at the HQ location and further reducing the exposure of public systems. Planned e-commerce improvements will also reduce exposure. Operating
systems are being updated to eliminate risks. More business critical systems are being moved to the cloud including email and its ERP system.
AVAILABLE INFORMATION
The Company’s internet website is https://www.koss.com. The Company makes available free of charge through its internet website the Company’s annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to those reports as soon as
reasonably practicable after they are electronically filed with (or furnished to) the Securities and Exchange Commission. These reports and other
information regarding the Company are also available on the SEC’s internet website at https://www.sec.gov. The information on the Company's website is
not part of this or any other report the Company files with or furnishes to the Securities and Exchange Commission.
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ITEM
1A.
RISK FACTORS
We are subject to various risks that may materially harm our business, prospects, financial condition and results of operations. This discussion
highlights some of the risks that may affect future operating results. These are the risks and uncertainties we believe are most important for you to
consider. We cannot be certain that we will successfully address these risks. If we are unable to address these risks, our business may not grow, our
stock price may suffer, and we may be unable to stay in business. Additional risks and uncertainties not presently known to us, which we currently
deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business, prospects,
results of operations and financial condition. The risks discussed below include forward-looking statements, and our actual results may differ
substantially from those discussed in these forward-looking statements.
Reduction in present levels of cash flow could adversely affect the Company’s business.
The Company’s primary source of liquidity historically has been operating cash flows. The Company’s future cash flows from operations (on both a short-
term and long-term basis) are dependent upon the following factors, among others:
● the Company’s ability to attract new customers that will sell the Company’s products and pay for them;
● the Company’s ability to retain its existing customers at the level of sales previously produced;
● the volume of sales for these customers;
● maintaining business from one or more primary customers;
Similarly, the Company’s future cash flows from operations are subject to the following risks and, among others:
● changes in types of products that customers purchase in their sales mix;
● poor or deteriorating economic conditions which would directly impact the ability of the Company’s customers to remain in business and
pay for their products on a timely basis;
● management’s ability to minimize the impact of requests for increases in material or labor cost; and
● the ability to collect in full and in a timely manner amounts due to the Company.
In addition, the Company’s cash flow is also dependent, to some extent, upon the ability to maintain operating margins. The continuing general downturn in
economic conditions or other events that may have caused or cause the Company’s customers to turn to lower-priced, lower-margin products could cause
the Company’s cash flow and profitability to be materially and adversely affected.
We are dependent on the proper functioning of our critical facilities, our contract manufacturers in China, our supply chain and distribution networks
and the financial stability of our customers, all of which have been negatively impacted by the COVID-19 pandemic in a manner that may have a
materially adverse effect on our business, financial condition or results of operations.
Our ability to produce products may be materially adversely impacted by COVID-19.
The COVID-19 pandemic is impacting worldwide economic activity, which has had a corresponding effect on our sales activity. The virus continues to
spread globally, has been declared a pandemic by the World Health Organization and has spread to over 100 countries, including the United States. The
impact of this pandemic has been and will likely continue to be extensive in many aspects of society, and has resulted in and will likely continue to result in
significant disruptions to the global economy, as well as businesses and capital markets around the world. With the ongoing effect of the COVID-
19 pandemic in the United States and other countries, it is unclear how economic activity and workflows will continue to be impacted and for how long.
Many employers are requiring their employees to work from home or not come into their offices or facilities. We produce certain stereo headphones out of
one facility in Milwaukee, Wisconsin. In order to mitigate the risk posed by COVID-19, we have implemented social distancing measures, mask policies,
including when warranted by state and local guidelines, and the implementation of new staffing plans in our facilities whereby certain employees work
remotely. Our actions continue to evolve in response to new government measures and scientific knowledge regarding COVID-19. To date, these protocols
have not resulted in a decrease in the production capabilities of our facility. However, if the manufacturing capabilities of this facility are adversely
impacted as a result of COVID-19, whether by a decrease in productivity caused by precautionary measures or by one or more employees becoming ill, it
may not be possible for us to timely produce relevant products at required levels or at all. A reduction or interruption in any of our manufacturing processes
could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We also might be unable to obtain certain supplies, product components, or equipment from our suppliers and vendors due to constraints created by
COVID-19. For instance, we have observed delays in certain suppliers’ deliveries of materials necessary for our contract manufacturers to manufacture our
products. Additionally, travel restrictions and stay-at-home orders or similar mandates of foreign and domestic governments have prevented US based
employees from visiting suppliers’ facilities as part of our quality control processes. These impacts may delay our launch of new products, adversely affect
our ability to deliver customers’ orders timely or in the requested quantities and inhibit our ability to ensure the quality of supplies used in our products.
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Our sales may be materially adversely impacted by COVID-19.
Our sales efforts include in-person meetings with customers and potential customers to discuss our products. Additionally, much of our customers’ sales are
conducted in-person by consumers purchasing our products in brick-and-mortar stores. The method and timing of these meetings and the ability of our
customers to make in-person sales have been altered due to stay-at-home orders and travel restrictions relating to COVID-19. This limitation on the ability
of our sales personnel and our customers to maintain their customary interaction with customers and consumers may negatively affect demand for our
products and have a material adverse effect on our results of operations, financial condition and cash flows.
Failure to attract and retain customers to sell the Company’s products could adversely affect sales volume and future profitability.
The Company markets a line of products used by consumers to listen to music. The Company distributes these products through retail channels in the U.S.
and independent distributors throughout the rest of the world. The Company is dependent upon its ability to attract and retain a base of customers to sell the
Company’s line of products. The Company has broad distribution across many channels including specialty stores, mass merchants, electronics stores and
computer retailers. The Company may not be able to maintain customers or model selections and therefore may experience a reduction in its sales revenue
until a model is restored to the mix or a lost customer is replaced by a new customer. The loss of business of one or more principal customers or a change in
the sales volume from a particular customer could have a material adverse effect on the Company’s sales volume and profitability.
A shift in customer specifications to lower priced items can reduce profit margins, negatively impacting profitability.
The Company sells a line of products with a suggested retail prices ranging from less than $10 up to $1,000. The gross margin for each of these models
varies in terms of percentages. The Company finds the low-priced portion of the market most competitive and therefore most subject to pressure on gross
margin percentages, which tends to lower profit contributions. Therefore, a shift in retail customer specifications and preferences toward lower priced items
could lead to lower gross margins and lower profit contributions per unit of sale. Due to the range of products that the Company sells, the product sales mix
can produce a variation in profit margins. Some distributors sell a limited range of products that yield lower profit margins than others. Most notably, the
budget-priced stereo headphone segment of the market (below $10 retail), which is distributed through mass market retailers, computer stores, and office
supply stores tends to yield the lowest gross margins. An increase in business with these types of accounts, if coupled with a simultaneous reduction in
sales to customers with higher gross margins, would reduce profit margins and profitability.
If we are unable to continue to develop innovative and popular products, our brand image may be harmed and demand for our products may decrease.
Consumer electronics are subject to constantly and rapidly changing consumer preferences based on industry trends and performance features, including
technological advancement. Our success depends largely on our ability to lead, anticipate, gauge and respond to these changing consumer preferences and
trends in a timely manner, while preserving and strengthening the perception and authenticity of our brand. We must continue to develop high performance
products that provide better design and performance attributes than the products of our competitors at similar price points. Market acceptance of new
designs and products is subject to uncertainty and we cannot assure you that our efforts will be successful. The inability of new product designs or new
product lines to gain market acceptance, or our current products losing traction in the market, could adversely affect our brand image, our business and
financial condition. Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to increase consumer
demand, which could constrain our management, financial and operational resources. If new products we introduce do not experience broad market
acceptance or demand for our existing products wanes, our net sales and market share could decline.
We may not be able to compete effectively, which could cause our net sales and market share to decline.
The consumer electronics industry is highly competitive, and characterized by frequent introduction of new competitors, as well as increased competition
from established companies expanding their product portfolio, aggressive price cutting and resulting downward pressure on gross margins and rapid
consolidation of the market resulting in larger competitors. We face competition from consumer electronics brands that have historically dominated the
stereo headphone market, in addition to sport brand and lifestyle companies that also produce headphone products. These companies include, among others,
Apple, Sony, Bose, LG and Samsung. These competitors may have significant competitive advantages, including greater financial, distribution, marketing
and other resources, longer operating histories, better brand recognition among certain groups of consumers, and greater economies of scale. In addition,
these competitors have long-term relationships with many of our larger retailers that are potentially more important to those retailers. As a result, these
competitors may be better equipped to influence consumer preferences or otherwise increase their market share by:
● quickly adapting to changes in consumer preferences;
● readily taking advantage of acquisition and other opportunities;
● discounting excess inventory;
● devoting greater resources to the marketing and sale of their products, including significant advertising, media placement and product
endorsement;
● adopting aggressive pricing policies; and
● engaging in lengthy and costly intellectual property and other legal disputes.
Additionally, the industry in which we compete generally has low barriers to entry that allow the introduction of new products or new competitors at a fast
pace. Some retailers have begun to introduce their own private label headphones, which could reduce the volume of product they buy from us, as well as
decrease the shelf space they allocate to our products. If we are unable to protect our brand image and authenticity, while carefully balancing our growth,
we may be unable to effectively compete with these new market entrants or new products. The inability to compete effectively against new and existing
competitors could have an adverse effect on our net sales and results of operations, preventing us from achieving future growth.
If we are unable to obtain intellectual property rights and/or enforce those rights against third parties who are violating those rights, including by
obtaining a favorable outcome in litigation in which we are currently engaged, our business could suffer.
We rely on various intellectual property rights, including patents, trademarks, trade secrets and trade dress to protect our brand name, reputation, product
appearance and technology. If we fail to obtain, maintain, or in some cases enforce our intellectual property rights, our competitors may be able to copy our
designs, or use our brand name, trademarks or technology. As a result, if we are unable to successfully protect our intellectual property rights, or resolve
any conflicts effectively, our results of operations may be harmed. In order to enforce our intellectual property rights, we recently filed complaints against
certain parties alleging infringement on patents relating to our wireless audio technology. All litigation is uncertain, and there can be no assurance that any
of this litigation will be decided in our favor. Regardless of the merits of the claims, litigation may be expensive, time-consuming and disruptive to our
operations and distracting to management. If resolved against us, such legal proceedings could result in excessive verdicts, injunctive relief or other
equitable relief that may affect how we operate our business. Similarly, if we settle such legal proceedings, it may negatively affect how we operate our
business.
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We may be adversely affected by the financial condition of our retailers and distributors.
Some of our retailers and distributors are experiencing financial difficulties as a result of current adverse economic conditions. A retailer or distributor
experiencing such difficulties generally will not purchase and sell as many of our products as it would under normal circumstances and may cancel orders.
In addition, a retailer or distributor experiencing financial difficulties generally increases our exposure to uncollectible receivables. We extend credit to our
retailers and distributors based on our assessment of their financial condition, generally without requiring collateral, and sometimes are not able to obtain
information regarding their current financial status. Failure of these retailers or distributors to remain current on their obligations to us could result in losses
that exceed the reserves we set aside in anticipation of this risk. We are also exposed to the risk of our customers declaring bankruptcy, exposing us to
claims of preferential payment claims. Financial difficulties on the part of our retailers or distributors could have a material adverse effect on our results of
operations and financial condition.
One of our customer’s accounts for a significant amount of our net sales, and the loss of, or reduced purchases from, this or other customers could
have a material adverse effect on our operating results.
Our largest customer, Wal-Mart, accounted for more than 18% and 18% of our net sales in fiscal years 2020 and 2019, respectively. We do not have long-
term contracts with any of our customers and all of our customers generally purchase from us on a purchase order basis. As a result, this customer generally
may, with no notice or penalty, cease ordering and selling our products, or materially reduce its orders. If certain customers, individually or in the
aggregate, choose to no longer sell our products, to slow their rate of purchase of our products or to decrease the number of products they purchase, our
results of operations would be adversely affected.
Company profits can suffer from interruption in its supply chain.
The Company uses contract manufacturing facilities in the People’s Republic of China, Taiwan and South Korea. The Company is at risk of business
interruptions due to natural disaster, war, disease and government intervention through tariffs or trade restrictions, which lately have become of increased
concern in these areas. Therefore, any interruptions in the supply chain for any of these reasons could directly impact the Company’s profits in a material,
negative way. The Company is also at risk if trade restrictions are imposed on the Company’s products based upon country of origin. In addition, the
Company may not be able to pass along most increases in tariffs and freight charges to the Company’s customers, which would directly affect profits.
Economic regulation, trade restrictions, and increasing manufacturing costs in China could adversely impact our business and results of operations.
The Company uses contract manufacturing facilities in the People’s Republic of China. For many years, the Chinese economy has experienced periods of
rapid growth. An increase in the cost of labor or taxes on wages in China may lead to an increase in the cost of goods manufactured in China. Significant
increases in wages or wage taxes paid by contract manufacturing facilities may increase the cost of goods manufactured in China which could have a
material adverse effect on the Company’s profit margins and profitability. Additionally, government trade policies, including the imposition of tariffs,
export restrictions, sanctions or other retaliatory measures could limit our ability to source materials and products from China at acceptable prices or at all.
We do not currently have arrangements with contract manufacturers in other countries that may be acceptable substitutes. We cannot predict what actions
may ultimately be taken with respect to tariffs, export controls, countermeasures, or other trade measures between the U.S. and China or other countries and
what products may be subject to such actions. To the extent such actions inhibit our transactions with contract manufacturing facilities and suppliers in
China, our business may be materially adversely affected.
We may be subject to risks related to doing business in, and having counterparties based in, foreign countries.
We engage in operations, and enter into agreements with counterparties, located outside the U.S., which exposes us to political, governmental and
economic instability and foreign currency exchange rate fluctuations. Any disruption caused by these factors could harm our business, results of operations,
financial condition, liquidity and prospects. Risks associated with potential operations, commitments and investments outside of the U.S. include but are
not limited to risks of:
● global and local economic, social and political conditions and uncertainty;
● currency exchange restrictions and currency fluctuations;
● war or terrorist attack;
● local outbreak of disease, such as COVID-19;
● renegotiation or nullification of existing contracts or international trade arrangements;
● labor market conditions and workers’ rights affecting our manufacturing operations or those of our customers;
● macro-economic conditions impacting key markets and sources of supply;
● changing laws and policies affecting trade, taxation, financial regulation, immigration, and investment;
● compliance with laws and regulations that differ among jurisdictions, including those covering taxes, intellectual property ownership and
infringement, imports and exports, anti-corruption and anti-bribery, antitrust and competition, data privacy, and environment, health, and
safety; and
● general hazards associated with the assertion of sovereignty over areas in which operations are conducted, transactions occur, or
counterparties are located.
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Fluctuations in currency exchange rates could affect the Company’s financial results and operations, including with respect to pricing of products and
overall demand for the Company’s products.
The Company receives a material portion of its sales and profits from business in Europe. To the extent that the value of the U.S. dollar increases relative to
currencies in those jurisdictions, it increases the cost of the Company’s products in those jurisdictions, which could create negative pressure on the foreign
demand for the Company’s products. The Company is paid by its international customers in U.S. dollars. To the extent that increased prices arising from
currency fluctuations decrease the overall demand for the Company’s products or motivate customers to purchase lower-priced, lower profit products, the
Company’s sales, profits and cash flows could be adversely affected.
Our products may experience quality problems from time to time that can result in decreased sales and operating margin and harm to our reputation.
From time to time, our products may contain design and manufacturing defects. There can be no assurance we will be able to detect and fix all defects in
the hardware we sell. Failure to do so could result in lost revenue, significant warranty and other expenses, and harm to our reputation.
An information systems interruption or breach in security could adversely affect us.
Privacy, security, and compliance concerns have continued to increase as technology has evolved. We rely on accounting, financial and operational
management information systems to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business.
Furthermore, as part of our normal business activities, we collect and store common confidential information about customers, employees, vendors, and
suppliers. This information is entitled to protection under a number of regulatory regimes. Any failure to maintain the security of the data, including the
penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our
reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in
deterioration in customers confidence in us and other competitive disadvantages, and thus could have a material adverse impact on our financial condition
and results of operations.
Our stock price is subject to volatility.
Our stock is subject to substantial price volatility. Additionally, the Company, the technology industry, and the stock market as a whole have experienced
extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to companies' operating performance.
Factors such as the depth and liquidity of the market for our common stock, investor perceptions of us and our business, actions by institutional
shareholders, strategic actions by us, litigation, changes in accounting standards, policies, guidance, interpretations and principles, additions or departures
of key personnel and our results of operations, financial performance and future prospects may cause the market price and demand for our common stock to
fluctuate substantially, which may limit or prevent investors from realizing the liquidity of their shares.
Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to income taxes in the United States. Our effective income tax rate could be adversely affected in the future by a number of factors,
including: changes in the valuation of deferred tax assets and liabilities and changes in tax laws. We regularly assess all of these matters to determine the
adequacy of our tax provision.
ITEM 2.
PROPERTIES.
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 extending the expiration to June 30, 2023. The lease extension maintained the rent at a fixed rate of $380,000 per year and it is being
accounted for as an operating lease. The Company is responsible for all property maintenance, insurance, taxes, and other normal expenses related to
ownership. The Company utilizes its Milwaukee facility for administrative, corporate and production functions. All facilities are in good repair and, in the
opinion of management, are suitable and adequate for the Company’s business purposes.
ITEM 3.
LEGAL PROCEEDINGS.
As part of its intellectual property enforcement program, on or about July 22, 2020 the Company brought patent infringement suits in the U.S. District
Court for the Western District of Texas against each of Apple Inc., Bose Corporation, PEAG, LLC d/b/a JLab Audio, Plantronics, Inc. and Polycom, Inc.,
and Skullcandy, Inc., alleging infringement of the Company’s patents relating to its wireless headphone technology and seeking monetary relief and
attorneys’ fees.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.
MARKET INFORMATION ON COMMON STOCK
The Company’s common stock is traded on The Nasdaq Capital Market under the trading symbol KOSS. There were 382 record holders of the Company’s
common stock as of August 17, 2020. This number does not include individual participants in security position listings. There were no dividends declared
during the fiscal years ended June 30, 2020 and 2019.
COMPANY REPURCHASES OF EQUITY SECURITIES
Period (2020)
April 1-April 30
May 1-May 31
June 1-June 30
Total
Number
of Shares
Purchased
Total Number of
Average
Price Paid
per Share
Shares Purchased as
Part of Publicly
Announced Plan (1)
— $
— $
— $
—
—
—
Approximate Dollar Value
of
Shares Available under
Repurchase Plan
— $
— $
— $
2,139,753
2,139,753
2,139,753
(1) In April 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 amount authorized
for repurchase under the program. As of June 30, 2020, the Board had authorized the repurchase of an aggregate of $45,500,000 of common stock under
the stock repurchase program, of which $43,360,247 had been expended. No purchases were made during the years ended June 30, 2020 or 2019.
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The purpose of this discussion and analysis is to enhance the understanding and evaluation of the financial position, results of operations, cash flows,
indebtedness and other key financial information of the Company for fiscal years 2020 and 2019. Our MD&A should be read in conjunction with the
Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form
10-K.
Overview
The Company developed stereo headphones in 1958 and has been a leader in the industry ever since. We market a complete line of high-fidelity
headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling
headphones. Koss operates as one business segment, as its principal business line is the design, manufacture and sale of stereo headphones and related
accessories.
The Company’s products are sold domestically and internationally through a variety of retailers and distributors, as well as directly to other manufacturers
for including with their own products. Changes in sales volume are driven primarily by the addition or loss of customers, a customer adding or removing a
product from its inventory, or changes in economic conditions. They are relatively less impacted by seasonality or the traditional holiday shopping season.
Although certain of the Company's products could be viewed as essential by consumers for use with mobile phones and other portable electronic
devices, other products are more of a discretionary spend. The results of the Company's operations are therefore susceptible to consumer confidence and
macroeconomic factors.
Fiscal Year 2020 Summary
• Net sales decreased 16.2% to $18,311,830 on volume declines in the export markets. The export sales declined for most distributors, driven by effects
of currency devaluations against the US dollar and COVID-19, and the contract ended for an original equipment manufacturer ("OEM") customer in
Asia. Domestic sales declined 1% compared to the prior year.
• Gross profit as a percent of sales decreased 0.3% to 30.9%. The decrease was primarily due to the decline in volume and a change in the mix of sales
by product and by channel.
• Selling, general and administrative spending was lower as a result of decreased costs for legal expense, deferred compensation expense and an increase
in the credit for cash surrender value of life insurance.
• Tax expense for the year ended June 30, 2020 was minimal due to an offsetting change in the valuation allowance for deferred tax assets.
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The following table presents selected consolidated financial data for each of the past two fiscal years:
Consolidated Results
Consolidated Performance Summary
Net sales
Net sales (decrease) %
Gross profit
Gross profit as % of net sales
Selling, general and administrative expenses
Selling, general and administrative expenses as % of net sales
Interest income
(Loss) income before income tax provision (benefit)
(Loss) income before income tax provision as % of net sales
Income tax provision (benefit)
Income tax provision as % of income (loss) before taxes
$
$
$
$
$
$
2020
18,311,830
5,662,608
6,146,650
20,185
(463,857)
$
(16.2)%
$
30.9%
$
33.6%
$
$
(2.5)%
$
0.4%
1,740
2019*
21,842,097
(7.1)%
6,819,874
31.2%
6,543,566
30.0%
3,178
279,486
1.3%
(26,503)
9.5%
*As adjusted for the retrospective change in accounting policy.
2020 Results of Operations Compared with 2019
Net sales for 2020 decreased primarily due to decreased sales in the Company's export markets. Domestic sales reflected mixed results among markets but,
overall, declined 1% compared to 2019.
Export net sales decreased by $3,435,837 to $3,150,519. Sales to an OEM customer in Asia decreased by approximately $973,000 as the contract with this
customer was completed during fiscal year 2020. Sales volumes with export distributors were weak early in the year as the strength of the US dollar
impacted their margins. The declines worsened when the economies of many countries were adversely affected by the COVID-19 pandemic. Net sales to
the key distributors in Europe declined by more than 50% with drastically reduced sales in the last few months of the fiscal year. The Company would
expect to see some improvement in these markets as the economic conditions improve following the COVID-19 pandemic.
For the year ended June 30, 2020, domestic net sales decreased from $ 15,255,741 to $ 15,161,311. There was a significant shift in sales from mass retail
to online as the impacts of the COVID-19 pandemic rippled through the markets. The internal Direct to Consumer ("DTC") team, which manages sales at
Koss.com and select Koss product listings on Amazon.com (through Amazon Seller Central Marketplace), was able to quickly adjust to the shift and
generate approximately $1,191,000 net DTC sales, up from approximately $594,000 in the year ended June 30, 2019. DTC sales do not include sales Koss
makes to Amazon.com directly using Amazon Vendor Central. This increase in DTC sales largely offset the decline in sales to mass retail customers and
sales to customers which sell online. Mass retail sales were negatively impacted by changes in product placement and timing of back-to-school sales.
Sales into the education marketplace increased with sales focused on supporting online testing. Certain distributors had lower sales as the markets adjusted
to the impacts of COVID-19.
Gross profit decreased to 30.9% for the year ended June 30, 2020, compared to 31.2% for the prior fiscal year. The margin rates are very dependent on
mix of sales by customer, product and sales channel. Improved sales in the direct to consumer market offset the impacts of decreased sales in the export
markets. In addition, the lower sales caused overhead absorption to be a drag on margin rates.
Selling, general and administrative expenses decreased to $6,146,650, which was $396,916 less than the prior year. Decreased legal expense, decreased
deferred compensation expense and an increased benefit from cash surrender value of life insurance caused the decline in expense. Legal fees declined
approximately $238,000 due to recovery of fees related to certain patent enforcement actions. Deferred compensation expense declined by
approximately $112,000 due to changes in the assumptions on retirement dates and discount rates. Cash surrender value increased by
approximately $122,000 more than the prior year, which included a charge to adjust certain policies.
As previously reported, the Company has launched a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio.
The Company has continued to enforce its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents
relating to its wireless headphone technology. The Company has recovered certain of the fees and costs that were involved with the underlying efforts to
enforce this portfolio, as further described in the notes to the financial statements included in this Annual Report on Form 10-K. If the program is
successful, the Company may receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position;
however, there is no guarantee of a positive outcome from these efforts, which could ultimately be time consuming and unsuccessful.
Income tax expense for the year ended June 30, 2020, was comprised of the U.S. federal statutory rate of 21% and the effect of state income taxes offset by
an adjustment to the valuation allowance for deferred tax assets. The effective tax rate was approximately was approximately 0% in the fiscal year
ended June 30, 2020. It is anticipated that the effective rate in future years will be reduced by utilization of a portion or all of the approximately
$897,000 of federal net operating loss carryforwards.
The Company has been closely monitoring the COVID-19 situation to protect the health and safety of its employees and customers. Business plans are
being executed to maintain supply of the Company’s products to our customers throughout the world.
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The Company’s financial results for the year ended June 30, 2020 were negatively impacted by the retail sales disruptions caused by government restriction
implemented to control the spread of COVID-19. The Company was positively impacted by the initial demand for specific communication headphones as
restrictions were imposed and more people worked from home and studied online. Despite this initial surge in demand, the Company recorded lower sales
in the latter part of the fiscal year ended June 30, 2020. The retail businesses throughout the Company’s markets have seen severe curtailment of hours and
complete closures. This has resulted in a decline in business across our markets with the exception of on-line retail. The Company expects these negative
sales impacts to continue unless markets fully re-open and consumer spending returns to normal.
The magnitude of the COVID-19 pandemic, including the extent of any impact on the Company’s business, financial position, results of operations or
liquidity, which could be material, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation. The Company's
future results will be heavily determined by the duration of the pandemic, its geographic spread, further business disruptions and the overall impact on the
global economy.
The Company’s supply chain is primarily in southern China. This portion of the Company's supply chain was disrupted early in the quarter ended March
31, 2020. These disruptions are now having little on-going impact. The remaining impacts relate to the movement of new product introductions and costs.
The Company is monitoring the situation closely and the supply chain team has been adapting business plans, which include, but are not limited to:
(1) being alert to potential short supply situations; (2) accelerating delivery times from key suppliers; and, (3) utilizing alternative sources and/or air
freight. The Company is committed to continuing to execute these plans and will remain in close contact with its supply chain to monitor future possible
implications, especially on production facilities.
To protect the safety, health and well-being of employees, customers, and suppliers, the Company continues to implement several preventive measures
while also meeting the needs of global customers. They include increased frequency of cleaning and disinfecting of facilities, social distancing practices,
remote working when possible, restrictions on business travel, cancellation of certain events and limitations on visitor access to facilities.
The Company had $3,999,409 of cash and available credit facilities of $5,000,000 on June 30, 2020, which the Company expects to be sufficient to fund its
operations beyond the next twelve months from the date of filing this Form 10-K.
Cash Flows
Liquidity and Capital Resources
The following table summarizes our cash flows from operating, investing and financing activities for each of the past two fiscal years:
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
*As adjusted for change in accounting policy (Note 3)
Operating Activities
2020
2019*
$
$
1,801,702 $
(537,275)
506,700
1,771,127 $
1,411,065
(310,993)
46,677
1,146,749
Changes in operating assets and liabilities generated $1,597,977 in cash during the year ended June 30, 2020. The Company decreased accounts receivable
by $1,338,079 and decreased inventory by $1,312,654. The cash generated by decreasing accounts receivable and inventory was partially offset by a
decline of $608,668 in accounts payable. These changes reflect the results of efforts to align working capital to the changes in the business.
Investing Activities
Cash used in investing activities was higher for 2020 as the Company increased spending on tooling and equipment compared to fiscal year 2019. In 2021,
the Company is planning approximately $600,000 for tooling, software implementation and leasehold improvements. The tooling expenditures are to
support new product introductions. The Company expects to generate sufficient funds through operations to fund these expenditures.
Financing Activities
The $506,700 cash generated from financing activities is the unsecured loan the Company entered into under the Small Business Administration Paycheck
Protection Program of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") through Town Bank. As of June 30, 2020, the Company
had no outstanding borrowings on its bank line of credit facility under the Credit Agreement (described below under "Credit Facility").
There were no purchases of common stock in 2020 or 2019 under the stock repurchase program. No stock options were exercised in 2020.
Liquidity
In addition to capital expenditures, the Company has interest payments when it uses its line of credit facility. The Company believes that cash generated
from operations, together with borrowings available under its credit facility, should provide it with adequate liquidity to meet operating requirements, debt
service requirements, and capital expenditures. Management is focusing on increasing sales, especially in the export markets, increasing new product
introductions, increasing the generation of cash from operations, and improving the Company’s overall earnings to help improve the Company’s liquidity.
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.
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Credit Facility and SBA Loan
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 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. 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 June
30, 2020 , the Company was in compliance with all covenants related to the Credit Agreement and there were no outstanding borrowings on the facility.
On April 13, 2020, the Company received an unsecured loan (the "SBA Loan") under the Small Business Administration ("SBA") Paycheck Protection
Program of the CARES Act through Town Bank (“Lender”). The SBA Loan funds that were disbursed on April 14, 2020, have a two-year term expiring
on April 14, 2022. The SBA Loan has a principal amount of $506,700 with an interest rate of 1.0%. The Company applied for forgiveness on August 7,
2020, of the full amount of the SBA Loan using the allowed twenty-four week period. The Company expects that the full principal amount of the loan will
be forgiven. Interest accrues during the period between funding and the date the loan is forgiven.
Stock Repurchase Program
In April 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 of between $1,000,000 to $5,000,000 in
the stock repurchase program. As of June 30, 2020, the most recently approved increase was for additional purchases of $2,000,000, which occurred in
October 2006, for an aggregate maximum of $45,500,000, of which $43,360,247 had been expended through June 30, 2020. The Company intends to effect
all stock purchases either on the open market or through privately negotiated transactions and intends to finance all stock purchases through its own cash
flow or by borrowing for such purchases.
There were no stock repurchases under the program in fiscal year 2020 or 2019. As of June 30, 2020, the Board of Directors has authorized the repurchase
by the Company of up to $2,139,753 in Company common stock at the discretion of the Chief Executive Officer of the Company. Future stock purchases
under this program are dependent on management’s assessment of value versus market price.
Contractual Obligation
The Company leases the facility 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. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership. The
facility is in good repair and, in the opinion of management, is suitable and adequate for the Company’s business purposes.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Consolidated Financial Statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We continually evaluate our estimates and judgments, including those related to doubtful accounts, product returns, excess
inventories, warranties, impairment of long-lived assets, deferred compensation, income taxes and other contingencies. We base our estimates on historical
experience and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited
to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions, the speed of the anticipated
recovery, access to capital markets, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that
generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown
future impacts of COVID-19 as of June 30, 2020 and through the date of the filing of this Annual Report on Form 10-K. The accounting matters assessed
included, but were not limited to estimates related to revenue, the accounting for potential liabilities and accrued expenses, the assumptions utilized in
valuing stock-based compensation issued for services, the realization of deferred tax assets, and assessments of impairment related to long-lived assets. The
Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the
Company’s consolidated financial statements in future reporting periods.
Despite the Company’s efforts, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration
and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is
unable to estimate the full extent to which COVID-19 will negatively impact its financial results or liquidity.
Revenue Recognition
Revenues from product sales are recognized when the customer obtains control of the product, which typically occurs upon shipment from the Company's
facility. There are a very limited number of customers for which control does not pass until they have received the products at their facility. Revenue from
product sales is adjusted for estimated warranty obligations and variable consideration, which are detailed below. In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (Topic 606), Revenue from Contracts with Customers. This new
standard supersedes nearly all existing revenue recognition guidance and provides a five-step analysis to determine when and how revenue is recognized.
The underlying principle is to recognize revenue when promised goods or services transfer to the customer. The amount of revenue recognized is to reflect
the consideration expected to be received for those goods or services. See Note 4 to the Consolidated Financial Statements for additional information on
revenue recognition.
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Accounts Receivable
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit
worthiness, as determined by the review of the customer’s current credit information. The Company continuously monitors collections and payments from
customers and maintains an allowance for estimated credit losses. Accounts receivable are stated net of an allowance for doubtful accounts. The
allowance is calculated based upon the Company’s evaluation of specific customer accounts where the Company has information that the customer may
have an inability to meet its financial obligations. In these cases, management uses its judgment, based on the best available facts and circumstances, and
records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific
reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved. However, the ultimate collectibility of the
unsecured receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without warning.
Inventories
Effective June 30, 2019, the Company changed its accounting principle for inventory to first-in, first-out ("FIFO") and discontinued the use of the last-in,
first-out ("LIFO") method for inventory valuation. This change in accounting principle did not change the inventory valuation as of June 30, 2018 or June
30, 2019 as the LIFO reserve was $0. The results of operations for the years ended June 30, 2018 and June 30, 2019 were not impacted by discontinuing
the use of LIFO since the LIFO reserve was reduced to $0 effective June 30, 2017.
The Company values its inventories at the lower of cost or market. Valuing inventories at the lower of cost or market requires the use of estimates and
judgment. The Company continues to use the same techniques to value inventories that it has in the past, with the exception of discontinuing the use of
LIFO. Our customers may cancel their orders or change purchase volumes. This, or certain additional actions or market developments, could create excess
inventory levels, which would impact the valuation of our inventories. Any actions taken by our customers or market developments that could impact the
value of our inventory are considered when determining the lower of cost or market valuations. The Company regularly reviews inventory quantities on
hand and records a provision for excess and obsolete inventory based primarily on historical and projected usage and production requirements. If the
Company is not able to achieve its expectations of the net realizable value of the inventory at its current value, the Company would have to adjust its
reserves accordingly.
Product Warranty Obligations
The Company offers a lifetime warranty to consumers in the United States and certain other countries. This lifetime warranty creates a future performance
obligation. There are also certain foreign distributors that receive warranty repair parts and replacement headphones to satisfy warranty obligations in those
countries. The Company defers revenue to recognize the future obligations related to these warranties. The deferred revenue is based on historical analysis
of warranty claims relative to sales. This deferred revenue reflects the Company's best estimates of the amount of warranty returns and repairs it will
experience during those future periods. If future warranty activity varies from the estimates, the Company will adjust the estimated deferred revenue, which
would affect net sales and operating results in the period that such adjustment becomes known.
Deferred Compensation
The Company’s deferred compensation liabilities are for a current and former officer and are calculated based on compensation, years of service and
mortality tables. The related expense is calculated using the net present value of the expected payments and is included in selling, general and
administrative expenses in the Consolidated Statements of Operations. Management makes estimates of life expectancy and discount rates using
information available from several sources. In addition, management estimates expected retirement date for the current officer as that impacts the timing
for expected future payments. See Note 10 for additional information on deferred compensation.
Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is described more fully in Note 12. The Company accounts for stock-based
compensation in accordance with ASC 718 "Compensation - Stock Compensation". Under the fair value recognition provisions of this statement, share-
based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. The
expected term of the options and volatility are estimated using historical experience for the options by vesting period. The risk-free interest rate is
calculated based on the expected life of the options. The Company does not estimate forfeitures as they are recognized when they occur.
Income Taxes
We estimate a provision for income taxes based on the effective tax rate expected to be applicable for the fiscal year. If the actual results are different from
these estimates, adjustments to the effective tax rate may be required in the period such determination is made. Additionally, discrete items are treated
separately from the effective rate analysis and are recorded separately as an income tax provision or benefit at the time they are recognized.
Deferred income taxes are accounted for under the asset and liability method whereby deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred income tax assets and liabilities are measured using statutory tax rates. Deferred income tax provisions are based on changes in the
deferred tax assets and liabilities from period to period. Additionally, we analyze our ability to recognize the net deferred income tax assets created in each
jurisdiction in which we operate to determine if valuation allowances are necessary based on the “more likely than not” criteria.
New Accounting Pronouncements
Applicable new accounting pronouncements are set forth under Item 15 of this annual report and are incorporated herein by reference.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements included herewith.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
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) that such information is accumulated and communicated to
management, including the principal 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 June 30, 2020. The Company’s management has concluded that the Company’s
disclosure controls and procedures as of June 30, 2020 were effective.
Management’s Annual Report on Internal Controls over Financial Reporting.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) and designing such internal controls to provide
reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. There are inherent limitations to the effectiveness of any system of internal
control over financial reporting, including the possibility of human error or the circumvention or overriding of controls and procedures. Accordingly, even
effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.
Management conducted its evaluation of the effectiveness of its internal control over financial reporting based on the framework in the “1992 Internal
Control-Integrated Framework,” the 2006 "Internal Control Over Financial Reporting - Guidance for Smaller Public Companies," and the "2013 COSO
Framework & SOX Compliance," all issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this
evaluation, management has concluded that the Company’s internal control over financial reporting as of June 30, 2020 was effective.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange
Act) during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
On August 25, 2020, the Board of Directors of Koss Corporation approved a reduction in the minimum number of Board members outlined in the By-Laws
of Koss Corporation from five to four. A copy of the Amendment to Section 3.01 of the Amended and Restated By-Laws of Koss Corporation is being filed
as Exhibit 3.4 to this Form 10-K. This disclosure is included in this Form 10-K rather than filing a Form 8-K under Item 5.03 at a later time.
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ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
PART III
This information is incorporated by reference to the sections entitled "Information as to the Nominees," "Board Committees - Audit Committee," "Code of
Ethics," "Executive Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance" from Koss Corporation’s Proxy Statement for its 2020
Annual Meeting of Stockholders filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.
The Company adopted a code of ethics, which is a "code of ethics" as defined by applicable rules of the SEC, which is applicable to its directors, officers
and employees. The code of ethics is publicly available on the Company's website at investors.koss.com. If the Company makes any substantive
amendments to the code of ethics or grants any waiver, including any implicit waiver, from a provision of the code to its principal executive officer,
principal financial officer, principal accounting officer or controller or persons performing similar functions, the Company will disclose the nature of the
amendment or waiver on that website or in a report on Form 8-K.
ITEM 11.
EXECUTIVE COMPENSATION.
This information is incorporated by reference to the sections entitled "Board Committees - Compensation Committee," "Summary Compensation Table,"
"Outstanding Equity Awards at Fiscal Year End," and "Director Compensation Table" from Koss Corporation’s Proxy Statement for its 2020 Annual
Meeting of Stockholders to be filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
This information is incorporated by reference to the sections entitled "Beneficial Ownership of Company Securities" and "Outstanding Equity Awards at
Fiscal Year End" from Koss Corporation’s Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the Commission under Regulation
14A within 120 days of the end of the fiscal year covered by this Form 10-K.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
This information is incorporated by reference to the sections entitled "Board Committees," "Independence of the Board" and "Related Party Transactions"
from Koss Corporation’s Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the Commission under Regulation 14A within 120
days of the end of the fiscal year covered by this Form 10-K.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
This information is incorporated by reference to the sections entitled "Fees and Services" and "Audit Committee Pre-Approval Policies and Procedures"
from Koss Corporation’s Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the Commission under Regulation 14A within 120
days of the end of the fiscal year covered by this Form 10-K.
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ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PART IV
The following documents are filed as part of this report:
1. Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2020 and 2019
Consolidated Statements of Operations for the Years Ended June 30, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended June 30, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2020 and 2019
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
21
22
23
24
25
26
All schedules have been omitted because the information is not applicable, is not material or because the information required is included in the
Consolidated Financial Statements or the notes thereto.
3. Exhibits Filed
See Exhibit Index attached hereto.
20
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To the Board of Directors
Koss Corporation and Subsidiaries
Milwaukee, Wisconsin
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Koss Corporation and Subsidiaries (the “Company”) as of June 30, 2020 and 2019,
and the related statements of operations, stockholders’ equity, and cash flows for the years ended June 30, 2020 and 2019, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
aspects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for the years ended June
30, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Policy – Stock-Based Compensation
As discussed in Note 3 to the consolidated financial statements, the Company has elected to change its method of accounting for stock-based
compensation. The 2019 consolidated financial statements have been restated to reflect the change in accounting policy.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are
required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and the significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ WIPFLI LLP
We have served as the Company’s auditor since 2019
Milwaukee, Wisconsin
August 27, 2020
21
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KOSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30,
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $74,082 and $2,617, respectively
Inventories
Prepaid expenses and other current assets
Income taxes receivable
Total current assets
Equipment and leasehold improvements, net
Other assets:
Deferred income taxes
Operating lease right-of-use asset
Cash surrender value of life insurance
Total other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Operating lease liability
Short-term debt
Total current liabilities
Long-term liabilities:
Deferred compensation
Deferred revenue
Operating lease liability
Total long-term liabilities
Total liabilities
Stockholders' equity:
Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 7,404,831 and
7,382,706 shares, respectively
Paid in capital
Retained earnings
Total stockholder' equity
Total liabilities and stockholders' equity
*As adjusted for change in accounting policy (Note 3)
The accompanying notes are an integral part of these Consolidated Financial Statements.
22
2020
2019*
$
3,999,409 $
2,317,064
5,538,794
267,647
14,622
12,137,536
2,228,282
3,655,143
6,851,448
133,889
45,660
12,914,422
983,641
890,110
-
2,582,402
6,876,827
9,459,229
13,276
2,847,846
6,569,628
9,430,750
$
22,580,406 $
23,235,282
$
827,705 $
580,099
423,639
276,947
506,700
2,615,090
2,333,482
170,281
2,305,455
4,809,218
1,436,373
650,513
645,470
265,443
-
2,997,799
2,419,962
163,018
2,582,402
5,165,382
7,424,308
8,163,181
37,024
6,882,729
8,236,345
15,156,098
37,024
6,333,135
8,701,942
15,072,101
$
22,580,406 $
23,235,282
Table of Contents
KOSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30,
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
(Loss) income from operations
Interest income
(Loss) income before income tax provision (benefit)
Income tax provision (benefit)
Net (loss) income
(Loss) income per common share:
Basic
Diluted
Weighted-average number of shares:
Basic
Diluted
*As adjusted for change in accounting policy (Note 3)
The accompanying notes are an integral part of these Consolidated Financial Statements.
23
$
2020
18,311,830 $
12,649,222
5,662,608
2019*
21,842,097
15,022,223
6,819,874
6,146,650
6,543,566
(484,042)
276,308
(20,185)
(3,178)
(463,857)
279,486
1,740
(26,503)
(465,597) $
305,989
(0.06) $
(0.06) $
0.04
0.04
7,404,831
7,404,831
7,401,030
7,407,827
$
$
$
Table of Contents
KOSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
Operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
2020
2019*
$
(465,597) $
305,989
Provision for doubtful accounts
Depreciation of equipment and leasehold improvements
Stock-based compensation expense
Deferred income taxes
Change in cash surrender value of life insurance
Change in deferred compensation accrual
Deferred compensation paid
Net changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Income taxes receivable
Accounts payable
Accrued liabilities
Deferred revenue
Net cash provided by operating activities
Investing activities:
Purchase of equipment and leasehold improvements
Life insurance premiums paid
Net cash (used in) investing activities
Financing activities:
Proceeds from SBA loan
Proceeds from exercise of stock options
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
*As adjusted for change in accounting policy (Note 3)
The accompanying notes are an integral part of these Consolidated Financial Statements.
24
56,386
330,629
549,594
13,276
(194,083)
63,520
(150,000)
1,281,693
1,312,654
(133,758)
31,038
(608,668)
(70,414)
(214,568)
1,801,702
23,422
429,750
515,681
(13,276)
(72,019)
175,953
(150,000)
1,031,180
(712,769)
72,887
(13,285)
6,882
(138,448)
(50,882)
1,411,065
(424,159)
(113,116)
(537,275)
(187,756)
(123,237)
(310,993)
506,700
-
506,700
-
46,677
46,677
1,771,127
2,228,282
3,999,409 $
1,146,749
1,081,533
2,228,282
$
Table of Contents
KOSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Shares
Amount
Paid in Retained
Earnings
Capital
Total
Balance, June 30, 2018, as previously reported
Retrospective change in accounting policy (Note 3)
Adjusted balance, June 30, 2018
Net income, restated
Stock-based compensation expense, restated
Exercise of common stock options
Adjusted balance, June 30, 2019
Net (loss)
Stock-based compensation expense
Balance, June 30, 2020
7,382,706 $
-
7,382,706
-
-
22,125
7,404,831
-
-
7,404,831 $
The accompanying notes are an integral part of these Consolidated Financial Statements.
25
-
-
-
110
(18,617)
18,617
36,914 5,770,887 8,395,953
305,989
-
-
515,681
-
46,567
37,024 6,333,135 8,701,942
(465,597)
-
36,914 $ 5,752,270 $ 8,414,570 $ 14,203,754
-
14,203,754
305,989
515,681
46,677
15,072,101
(465,597)
549,594
37,024 $ 6,882,729 $ 8,236,345 $ 15,156,098
-
549,594
-
-
Table of Contents
KOSS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS — Koss Corporation ("Koss"), a Delaware corporation, and its 100%-owned subsidiaries (collectively the "Company"), reports
its finances as a single reporting segment, as the Company’s principal business line is the design, manufacture and sale of stereo headphones and related
accessories. The Company leases its plant and office in Milwaukee, Wisconsin. The domestic market is served by domestic sales representatives and
independent manufacturers' representatives working directly with certain retailers, distributors, and original equipment manufacturers. International
markets are served by domestic sales representatives and sales personnel in the Netherlands and Russia which utilize independent distributors in several
foreign countries. The Company has two subsidiaries, Koss Corp B.V. and Koss U.K. Limited ("Koss UK"), which were formed to comply with certain
European Union ("EU") requirements. Koss Corp B.V. and Koss UK are non-operating and hold no assets.
BASIS OF CONSOLIDATION — The Consolidated Financial Statements include the accounts of Koss and its subsidiaries, Koss Corp B.V. and Koss UK,
which are 100%-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION — Revenues from product sales are recognized when the customer obtains control of the product, which typically occurs
upon shipment from the Company's facility. There are a very limited number of customers for which control does not pass until they have received the
products at their facility. Revenue from product sales is adjusted for estimated warranty obligations and variable consideration, which are detailed below.
The amount of revenue recognized is to reflect the consideration expected to be received for those goods or services.
Warranties - The Company offers a lifetime warranty to consumers in the United States and certain other countries. This lifetime warranty creates a future
performance obligation. The Company determines the standalone selling price for this performance obligation using the cost plus method. There are also
certain foreign distributors that receive warranty repair parts and replacement headphones to satisfy warranty obligations in those countries. The Company
defers revenue to recognize the future obligations related to these warranties. The deferred revenue is based on historical analysis of warranty claims
relative to sales. This deferred revenue reflects the Company's best estimates of the amount of warranty returns and repairs it will experience during those
future periods. If future warranty activity varies from the estimates, the Company will adjust the estimated deferred revenue, which would affect net sales
and operating results in the period that such adjustment becomes known. The Company typically receives payment for product at the time of shipment or
under normal collection terms, which are generally 30-60 days. The Company estimates that the warranty related performance obligation is satisfied within
one to three years and therefore uses that same time frame for recognition of the deferred revenue, using amortization of 50% in the first year, 30% in the
second year, and 20% in the third year for domestic sales.
Reserves for Variable Consideration - Revenue from product sales is recorded at the net sales price, which includes estimates of variable consideration for
which reserves are established and which result from returns, rebates, and co-pay assistance that are offered within contracts between the Company and its
customers. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which it is entitled based on the terms of the
contract. If actual results in the future vary from the estimates, the Company will adjust these estimates, which would affect net sales and operating results
in the period such variances become known.
Product Returns - The Company generally offers customers a limited right of return. The Company estimates the amount of product sales that may be
returned by its customers and records the estimate as a reduction of revenue in the period the related product revenue is recognized. Product return
liabilities are estimated using historical sales and returns information. If actual results in the future vary from the estimates, the Company will adjust these
estimates, which would affect net sales and operating results in the period such variances become known.
Volume Rebates - The Company offers volume rebates to certain customers in the United States and certain foreign distributors. These volume rebates are
tied to sales volume within specified periods. The amount of revenue is reduced for variable consideration related to customer rebates, which are calculated
using expected values and is based on program specific factors such as expected rebate percentages and expected volumes. Changes in such accruals may
be required if actual sales volume differs from estimated sales volume, which would affect net sales and operating results in the period such variances
become known.
Sales Commissions - The Company has elected the practical expedient of not capitalizing sales commissions.
RESEARCH AND DEVELOPMENT — Research and development is primarily comprised of product prototypes and testing. These activities charged to
operations as a component of selling, general and administrative expenses in the accompanying Consolidated Statements of Operations amounted
to $397,360 and $334,789 in 2020 and 2019 respectively.
ADVERTISING COSTS — Advertising costs included within selling, general and administrative expenses in the accompanying Consolidated Statements
of Operations were $54,592 in 2020 and $47,657 in 2019. Such costs are expensed as incurred.
INCOME TAXES — The Company operates as a C Corporation under the Internal Revenue Code (the "Code"). Amounts provided for income tax
expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws.
Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected
to affect taxable income. As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for
income taxes. The differences relate principally to different methods used for depreciation and amortization for income tax purposes, net operating losses,
capitalization requirements of the Code, allowances for doubtful accounts, provisions for excess and obsolete inventory, stock-based compensation,
warranty reserves, and other income tax related carryforwards. Valuation allowances are established when necessary to reduce deferred income tax assets to
the amount expected to be realized.
PATENT COSTS — The Company incurs on-going legal fees and filing costs related to the patent portfolio. These costs are expensed in the period they are
incurred since no patent legal costs were probable to provide a future economic benefit.
26
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INCOME (LOSS) PER COMMON AND COMMON STOCK EQUIVALENT SHARE — Income (loss) per common and common stock equivalent share
is calculated under the provisions of Topic 260 in the Accounting Standards Codification ("ASC") which provides for calculation of “basic” and “diluted”
income (loss) per share. Basic income (loss) per common and common stock equivalent share includes no dilution and is computed by dividing net
income (loss) by the weighted average common shares outstanding for the period. Diluted income (loss) per common and common stock equivalent share
reflects the potential dilution of securities that could share in the earnings of an entity. See Note 11 for additional information on income (loss) per common
and common stock equivalent share.
CASH AND CASH EQUIVALENTS — The Company considers depository accounts and investments with a maturity at the date of acquisition and
expected usage of three months or less to be cash and cash equivalents. The Company maintains its cash on deposit at a commercial bank located in the
United States of America. The Company periodically has cash balances in excess of insured amounts. The Company has not experienced, and does not
expect to incur, any losses on these deposits.
ACCOUNTS RECEIVABLE — Accounts receivable consists of unsecured trade receivables due from customers. An allowance for doubtful accounts is
recorded for significant past due receivable balances based on a review of the past due item and general economic conditions.
INVENTORIES — As of June 30, 2020 and 2019, the Company’s inventory was recorded using standard cost which approximates the lower of FIFO cost
or net realizable value. Effective June 30, 2019, the Company changed its accounting principle for inventory and discontinued the use of the last-in, first-
out ("LIFO") method for inventory valuation and adopted the first-in, first-out ("FIFO") method of inventory. This change in accounting principle did not
change the inventory valuation as of June 30, 2019 as the LIFO reserve was $0. The results of operations for the year ended June 30, 2019 was not
impacted by discontinuing the use of LIFO since the LIFO reserve was reduced to $0 effective June 30, 2017. The carrying value of inventory is reviewed
for impairment on at least a quarterly basis or more frequently if warranted due to changes in market conditions. See Note 5 for additional information on
inventory.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS — Equipment and leasehold improvements are stated at cost. Depreciation and amortization is
calculated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-
line method over the shorter of the lease term or the estimated useful life of the asset. Major expenditures for property and equipment and significant
renewals are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs
and related accumulated depreciation and amortization are removed from the accounts and any resulting gains or losses are included in operations. See
Note 6 for additional information on equipment and leasehold improvements.
LEASES — The Company determines if a contract is a lease at the date of inception. The Company leases its facility in Milwaukee, Wisconsin from Koss
Holdings, LLC, which is wholly-owned by the former chairman, and is an operating lease.
Operating leases are reported on the Company's Consolidated Balance Sheets as operating lease right-of-use ("ROU") assets and operating lease liabilities.
Operating lease ROU assets and liabilities are valued at the present value of the future lease payment obligations. Operating lease expense is recorded on a
straightline basis over the life of the lease taking into account expected renewal periods.
LIFE INSURANCE POLICIES — Life insurance policies are stated at cash surrender value or at the amount the Company would receive in the case of
split-dollar arrangements. Increases in cash surrender value are included in selling, general and administrative expenses in the Consolidated Statements of
Operations, which is where the annual premiums are recorded.
DEFERRED COMPENSATION — The Company’s deferred compensation liabilities are for a current and former officer and are calculated based on
compensation, years of service and mortality tables. The related expense is calculated using the net present value of the expected payments and is included
in selling, general and administrative expenses in the Consolidated Statements of Operations. See Note 10 for additional information on deferred
compensation.
FAIR VALUE OF FINANCIAL INSTRUMENTS — Cash equivalents, accounts receivable, accounts payable and short-term debt approximate fair value
based on the short maturity of these instruments.
IMPAIRMENT OF LONG-LIVED ASSETS — The Company evaluates the recoverability of the carrying amount of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company evaluates the recoverability of
equipment and leasehold improvements annually, or more frequently if events or circumstances indicate that an asset might be impaired. If an asset is
considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value.
Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using an
undiscounted future cash flow analysis or other accepted valuation techniques. No impairments of the Company's long-lived assets were recorded in the
years ended June 30, 2020 or 2019.
LEGAL COSTS — All legal costs related to litigation, for which the Company is liable, are charged to operations as incurred, except settlements, which
are expensed when a claim is probable and can be reasonably estimated. Recoveries of legal costs are recorded when the amount and items to be paid are
confirmed by the third party. Proceeds from the settlement of legal disputes are recorded in income when the amounts are determinable and the collection
is certain.
STOCK-BASED COMPENSATION — The Company has a stock-based employee compensation plan, which is described more fully in Note 12. The
Company accounts for stock-based compensation in accordance with ASC 718 "Compensation - Stock Compensation". Under the fair value recognition
provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense
over the vesting period.
USE OF ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reported periods.
Actual results could differ from those estimates.
27
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2.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)", which removes certain exceptions related
to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax
liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This guidance is effective for annual reporting
periods, and interim periods within those reporting periods, beginning after December 15, 2020 with early adoption permitted. Certain amendments in this
update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a
modified retrospective basis through a cumulative-effect adjustment to retained earnings in the period of adoption. The company is currently evaluating the
impacts the adoption of this guidance will have on its Condensed Consolidated Financial Statements.
3.
CHANGE IN ACCOUNTING POLICY
During the first quarter of fiscal 2020, the Company changed its method of recording stock-based compensation expense. Under the new accounting
policy, 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 policy related to stock-based compensation
expense applied retrospectively was as follows:
Balance Sheet
June 30, 2019
Equity:
Paid in capital
Retained earnings
As Previously
Reported
Stock-Based
Compensation
Adjustment
As
Adjusted
$
$
6,186,393 $
8,848,684 $
146,742 $
(146,742) $
6,333,135
8,701,942
The impact of the change in principle on the Consolidated Statement of Operations for the year ended June 30, 2019 was as follows:
Statement of Operations
Year ended June 30, 2019
Selling, general and administrative expenses
Income from operations
Net income
Income per common share
Basic
Diluted
As Previously
Reported
Stock-Based
Compensation
Adjustment
As
Adjusted
6,415,441 $
404,433
434,114 $
128,125 $
(128,125)
(128,125) $
6,543,566
276,308
305,989
0.06 $
0.06 $
(0.02) $
(0.02) $
0.04
0.04
$
$
$
$
The impact of the change in principle on the Consolidated Statement of Cash Flows for the year ended June 30, 2019 was as follows:
Statement of Cash Flows
Year ended June 30, 2019
Operating activities:
Net income
Stock-based compensation expense
As Previously
Reported
Stock-Based
Compensation
Adjustment
As
Adjusted
$
$
434,114 $
387,556 $
(128,125) $
128,125 $
305,989
515,681
28
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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:
United States
Export
Net Sales
2020
15,161,311 $
3,150,519
18,311,830 $
$
$
2019
15,255,741
6,586,356
21,842,097
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 $427,193 and $497,351 in the years ended June 30, 2020 and 2019, respectively, for performance obligations related to consumer and
customer warranties. The deferred revenue liability was $859,370 as of June 30, 2018. The Company estimates that the deferred revenue performance
obligations are satisfied within one to three years and therefore uses the same time frame for recognition of the deferred revenue.
5.
INVENTORIES
The components of inventories at June 30, 2020 and 2019 were as follows:
Raw materials
Finished goods
Reserve for obsolete inventory
Total inventories
2020
1,953,031 $
5,149,200
7,102,231
(1,563,437)
5,538,794 $
2019
1,848,340
6,604,408
8,452,748
(1,601,300)
6,851,448
$
$
6.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The major categories of equipment and leasehold improvements at June 30, 2020 and 2019 are summarized as follows:
Machinery and equipment
Furniture and office equipment
Tooling
Computer equipment
Leasehold improvements
Assets in progress
Less: accumulated depreciation and amortization
Equipment and leasehold improvements, net
Estimated
useful lives (in
years)
5 - 10
5 - 10
5
3 - 5
3 - 10
N/A
2020
2019
$
$
593,595 $
357,351
4,310,917
658,028
2,682,933
327,348
8,930,172
7,946,531
983,641 $
593,595
357,351
4,261,077
758,819
2,517,226
118,737
8,606,805
7,716,695
890,110
29
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7.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes. The liability method measures the expected income tax impact of future taxable
income and deductions implicit in the Consolidated Balance Sheets. The income tax (benefit) provision in 2020 and 2019 consisted of the following:
Year Ended June 30,
Current:
Federal
State
Deferred
Total income tax provision (benefit)
The 2020 and 2019 tax results in an effective rate different than the federal statutory rate because of the following:
Year Ended June 30,
Federal income tax liability (benefit) at statutory rate
State income tax liability, net of federal income tax effect
(Decrease) increase in valuation allowance
Current year permanent items
R&D credit
Return-to-provision
Expiration of deferred tax assets
State tax rate change
Other
Total income tax provision (benefit)
2020
2019
(15,037) $
3,501
13,276
1,740 $
(13,277)
25
(13,251)
(26,503)
2020
2019
(97,409) $
2,765
61,948
35,931
(22,568)
(30,040)
44,790
18,962
(12,639)
1,740 $
85,599
20
(328,541)
14,687
(15,000)
8,433
189,186
-
19,087
(26,529)
$
$
$
$
Temporary differences which give rise to deferred income tax assets and liabilities at June 30, 2020 and June 30, 2019 include:
Deferred income tax assets:
Deferred compensation
Stock-based compensation
Accrued expenses and reserves
Deferred revenue
Federal and state net operating loss carryforwards
Credit carryforwards
Equipment and leasehold improvements
Valuation allowance
Total deferred income tax assets
Deferred income tax liabilities:
Other
Net deferred income tax assets
$
2020
2019
614,018 $
249,313
479,112
146,841
606,730
216,484
134,045
(2,444,035)
2,508
642,424
228,981
503,726
202,102
558,117
139,504
122,714
(2,382,087)
15,481
$
(2,508)
- $
(2,205)
13,276
Deferred income tax balances reflect the effects of temporary differences between the tax bases of assets and liabilities and their carrying amounts. These
differences are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. The recognition of these deferred tax balances
will be realized through normal recurring operations and, as such, the Company has recorded the value of such expected benefits. The Company has federal
net operating loss carryforwards of $352,281 which expire in fiscal year 2037 and $545,245 which can be carried forward indefinitely. The Company has
state net operating loss carryforwards totaling approximately $6,358,000 in Wisconsin, which expire in fiscal years 2025 through 2039, and $342,286 in
other states.
Generally accepted accounting principles prescribe a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken, or expected to be taken, in a tax return. There were no additional significant matters determined to be unrecognized
tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s Consolidated Financial Statements for the years ended
June 30, 2020 and 2019.
Additionally, GAAP provides guidance on the recognition of interest and penalties related to income taxes. No interest or penalties related to income taxes
has been accrued or recognized as of and for the years ended June 30, 2020 or 2019. The Company records interest related to unrecognized tax benefits in
interest expense.
The Company does not believe it has any unrecognized tax benefits as of June 30, 2020 or 2019. Any changes to the Company's unrecognized tax benefits
during the fiscal years ended June 30, 2020 and 2019 would have impacted the effective tax rate.
The Company files income tax returns in the United States federal jurisdiction and in several state jurisdictions. The Company’s federal tax returns for tax
years and state income tax returns are open for the standard regulatory period.
The following are the changes in the valuation allowance:
Balance,
beginning
Decrease
(Increase)
in valuation
Balance,
Year Ended June 30,
2020
2019
of year
allowance
end of year
$
$
(2,382,087) $
(2,710,628) $
(61,948) $
328,541 $
(2,444,035)
(2,382,087)
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8.
CREDIT FACILITY AND SBA LOAN
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 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. 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 June
30, 2020 , the Company was in compliance with all covenants related to the Credit Agreement and there were no outstanding borrowings on the facility. As
of June 30, 2020 and 2019 there were no outstanding borrowings on the facility.
On April 13, 2020, the Company received an unsecured loan (the "SBA Loan") under the Small Business Administration ("SBA") Paycheck Protection
Program of the CARES Act through Town Bank. The SBA Loan funds that were disbursed on April 14, 2020, have a two-year term expiring on April 14,
2022. The SBA Loan has a principal amount of $506,700 with an interest rate of 1.0%. The Company applied for forgiveness on August 7, 2020, for the
full amount of the SBA Loan using the allowed twenty-four week period, which is why the debt is classified as short-term on the consolidated balance
sheet. Interest accrues during the period between funding and the date the loan is forgiven.
The Company incurs interest expense primarily related to its secured credit facility. There was no interest expense for the years ended June
30, 2020 or 2019.
9.
ACCRUED LIABILITIES
Accrued liabilities as of June 30, 2020 and 2019 were as follows:
Cooperative advertising and promotion allowances
Customer credit balances
Current deferred compensation
Employee benefits
Legal and professional fees
Bonus and profit-sharing
Sales commissions and bonuses
Other
Total accrued liabilities
10.
DEFERRED COMPENSATION
2020
2019
158,770 $
16,363
150,000
80,399
68,200
8,098
53,647
44,622
580,099 $
188,985
65,937
150,000
60,178
65,914
18,694
51,026
49,779
650,513
$
$
The Company has deferred compensation agreements with a former and current officer. The related expense is calculated using the net present value of the
expected payments and is included in selling, general and administrative expenses in the Consolidated Statements of Operations. The Company's current
and non-current deferred compensation obligations are included in accrued liabilities and deferred compensation, respectively, in the Consolidated Balance
Sheets. The net present value was calculated for the former officer using a discount factor of 1.00% as of June 30, 2020 and 2.60% as of June 30, 2019. The
net present value was calculated for the current officer using a discount factor of 3.10% at June 30, 2020 and 4.80% as of June 30, 2019.
The Board of Directors entered into an agreement to continue the 1991 base salary of the former chairman for the remainder of his life. These payments
began in the fiscal year ended June 30, 2015, and payments of $150,000 were made under this arrangement for the years ended June 30, 2020 and 2019.
The Company has a deferred compensation liability of $416,883 and $540,379 recorded as of June 30, 2020 and 2019, respectively. Deferred
compensation expense of $26,504 and $17,495 was recognized under this arrangement in 2020 and 2019, respectively.
The Board of Directors has approved a supplemental retirement plan for an officer that calls for annual cash compensation following retirement from the
Company in an amount equal to 2% of base salary, as defined in the agreement, multiplied by the number of years of service to the Company. The
retirement payments are to be paid monthly to the officer until his death and then to his surviving spouse monthly until her death. The Company has a
deferred compensation liability of $2,066,599 and $2,029,583 recorded as of June 30, 2020 and 2019, respectively. Deferred compensation expense
of $37,016 and $158,458 was recognized under this arrangement in 2020 and 2019, respectively. The current officer's retirement date is assumed to be
October 2029, which is 3 years later than previously assumed.
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11.
(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 income per share:
Numerator
Net (loss) income
Denominator
Weighted average shares, basic
Dilutive effect of stock compensation awards (1)
Diluted shares
Net (loss) income attributable to common shareholders per share:
Basic
Diluted
Year Ended
2020
2019*
$
(465,597) $
305,989
7,404,831
-
7,404,831
7,401,030
6,797
7,407,827
$
$
(0.06) $
(0.06) $
0.04
0.04
(1) Excludes approximately 2,786,225 and 2,523,513 weighted average stock options for the years ended June 30, 2020 and 2019, respectively, as the
impact of such awards was anti-dilutive.
*As adjusted for change in accounting policy (Note 3)
12.
STOCK OPTIONS
In 2012, pursuant to the recommendation of the Board of Directors, the stockholders ratified the creation of the Company’s 2012 Omnibus Incentive Plan
(the “2012 Plan”), which superseded the 1990 Flexible Incentive Plan (the "1990 Plan"). The 2012 Plan is administered by a committee of the Board of
Directors and provides for granting of various stock-based awards including stock options to eligible participants, primarily officers and certain key
employees. A total of 2,000,000 shares of common stock were available under the terms of the 2012 Plan plus shares outstanding under the 1990 Plan
which expire or are otherwise forfeited, canceled or terminated after July 25, 2012, the Effective Date of the 2012 Plan. As of June 30, 2020, there were
770,308 options available for future grants. Options vest over a three to five year period from the date of grant, with a maximum term of five to ten years.
The Company's policy is to issue new shares when stock options are exercised.
The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model. The resulting compensation cost for
fixed awards with graded vesting schedules is amortized on a straight-line basis over the vesting period for the entire award. Forfeitures are accounted for
as they occur. The expected term of awards granted is determined based on historical experience with similar awards, giving consideration to the expected
term and vesting schedules. The expected volatility is determined based on the Company’s historical stock prices over the most recent period
commensurate with the expected term of the award. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term
commensurate with the expected term of the award.
As of June 30, 2020, there was $1,156,492 of total unrecognized compensation cost related to stock options granted under the 2012 Plan and 1990 Plan.
This cost is expected to be recognized over a weighted average period of 2.83 years. The Company recognized stock-based compensation expense of
$549,594 and $515,681 in 2020 and 2019, respectively. These expenses were included in selling, general and administrative expenses.
Options are granted at a price equal to or greater than the market value of the common stock on the date of grant. The per share weighted average fair value
of the stock options granted during the years ended June 30, 2020 and 2019 were $1.26 and $1.57, respectively. The fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing model. For the options granted in 2020 and 2019, the Company used the following
weighted-average assumptions:
Expected stock price volatility
Risk free interest rate
Expected dividend yield
Expected life of options (years)
32
2020
2019
74%
1.87%
—%
6.1
66%
2.86%
—%
5.8
Table of Contents
The following table identifies options granted, exercised, canceled, or available for exercise pursuant to the 1990 Plan and the 2012 Plan:
Stock
Options
Price Range
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life - Years
Aggregate
Intrinsic
Value of
In-The-
Money
Options
Number of
Shares
Shares under option at June 30, 2018
Granted
Exercised
Expired
Forfeited
Shares under option at June 30, 2019
Granted
Expired
Forfeited
Shares under option at June 30, 2020
Exercisable as of June 30, 2019
Exercisable as of June 30, 2020
2,405,000 $1.77 - $6.28 $
585,000 $2.63 - $2.92 $
(22,125) $1.77 - $2.24 $
(302,000) $1.77 - $5.83 $
(73,000) $1.77 - $2.65 $
2,592,875 $1.77 - $6.28 $
555,000 $1.97 - $2.17 $
(362,000) $2.20 - $6.28 $
(64,000) $1.77 - $2.65 $
2,721,875 $1.77 - $6.00 $
1,320,291 $1.77 - $6.28 $
1,408,709 $1.77 - $6.00 $
3.31
2.79
2.11
5.62
2.22
2.96
2.08
3.53
2.15
2.73
3.45
3.12
3.61 $
—
4.23 $
48,280
4.82 $
2.20 $
2.61 $
—
9,788
—
The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between the market value of the Company's stock
on any given date and the exercise price, multiplied by the number of in-the-money outstanding and exercisable stock options.
A summary of intrinsic value and cash received from stock option exercises and fair value of vested stock options for the fiscal years ended June 30, 2020
and 2019 is as follows:
Total intrinsic value of stock options exercised
Cash received from stock option exercises
Total fair value of stock options vested
Total recognized tax benefit
Non-vested as of June 30, 2018
Granted
Vested
Forfeited
Non-vested as of June 30, 2019
Granted
Vested
Forfeited
Non-vested as of June 30, 2020
2020
2019
— $
— $
483,461 $
— $
34,797
46,677
374,639
9,198
$
$
$
$
Weighted
Average
Grant Date
Fair Value
0.90
1.57
0.87
1.33
1.19
1.26
1.07
1.39
1.26
Shares
1,189,918
585,000
(429,334)
(73,000)
1,272,584
555,000
(450,418)
(64,000)
1,313,166
13.
STOCK REPURCHASE PROGRAM
In April 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 amount authorized for repurchase
under the program. As of June 30, 2020, the Board had authorized the repurchase of an aggregate of $45,500,000 of common stock under the stock
repurchase program, of which $43,360,247 had been expended. No shares were repurchased in 2020 or 2019.
The Company has an agreement with the former chairman, in the event of his death, at the request of the executor of his estate, to repurchase his Company
common stock from his estate. The Company does not have the right to require the estate to sell stock to the Company. As of June 30, 2019 and June 30,
2020, the estate of the former chairman does not hold a material amount of Company stock. As such, there is no exposure that the executor of the former
chairman's estate may require the Company to repurchase a material amount of stock in the event of his death. The repurchase price is 95% of the fair
market value of the common stock on the date that notice to repurchase is provided to the Company. The total number of shares to be repurchased will be
sufficient to provide proceeds which are the lesser of $2,500,000 or the amount of estate taxes and administrative expenses incurred by his estate. The
Company may elect to pay the purchase price in cash or may elect to pay cash equal to 25% of the total amount due and to execute a promissory note at the
prime rate of interest for the balance payable over four years. The Company maintains a $1,150,000 life insurance policy to fund a substantial portion of
this obligation.
33
Table of Contents
14.
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.
The Company used its incremental borrowing rate as of July 1, 2017, the retrospective date of adoption of ASU 2016-02 (Topic 842) Leases, to calculate
the net present value of the operating lease ROU asset and liability. The five year renewal option was included in the calculation of the ROU asset and
liability as the Company believes it is more likely than not to exercise its right to renew. The non-lease components of the agreement related to common
area maintenance charges are accounted for separately.
Supplemental information related to lease expense and valuation of the ROU asset and liability was as follows:
Operating lease cost
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Weighted-average remaining lease term (in years)
Weighted-average discount rate
$
$
Year Ended
2020
2019
380,000
$
380,000
(380,000) $
8
4.25%
(380,000)
9
4.25%
The maturity schedule of future minimum lease payments and reconciliation to the operating lease liabilities reported on the 2020 Consolidated Balance
Sheet is as follows:
Year Ending June 30,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Present value adjustment
Total lease liabilities
$
$
380,000
380,000
380,000
380,000
380,000
1,140,000
3,040,000
(457,598)
2,582,402
15.
EMPLOYEE BENEFIT PLANS
Substantially all domestic employees are participants in the Koss Employee Stock Ownership Trust ("KESOT") under which an annual contribution in
either cash or common stock may be made at the discretion of the Board of Directors. No contributions were made for the fiscal years 2020 or 2019.
The Company maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees of the Company
who have completed one full fiscal quarter of service. Matching contributions can be made at the discretion of the Board of Directors. For fiscal years
2020 and 2019, the matching contribution was 75% and 50% of employee contributions to the plan, respectively. Vesting of Company contributions occurs
immediately. Company contributions were $252,293 and $160,171 during 2020 and 2019, respectively.
16.
CONCENTRATIONS
The Company’s sales to its largest single customer, Wal-Mart, were approximately 18% and 18% of net sales in fiscal year 2020 and 2019, respectively.
Amazon, the second largest single customer, was approximately 11% and 7% of net sales in fiscal year 2020 and 2019, respectively. The five largest
customers of the Company (including Wal-Mart and Amazon in both years) accounted for approximately 48% and 47% of net sales in fiscal years 2020 and
2019, respectively. Accounts receivable from Wal-Mart as of June 30, 2020 and June 30, 2019, represented approximately 8% and 33% of trade account
receivables, respectively. Amazon accounts receivable as of June 30, 2020 and June 30, 2019, were 17% and 17% of trade accounts receivables,
respectively. The majority of international customers, outside of Canada, purchase products on a cash against documents or cash in advance basis.
Approximately 11% and 10% of the Company's trade accounts receivable at June 30, 2020 and 2019, were foreign receivables denominated in U.S. dollars.
The Company uses contract manufacturing facilities in the People’s Republic of China. The majority of the contract manufacturing is done by four vendors
with one vendor representing approximately 70% of the manufacturing costs. The Company has a long-term relationship with this vendor. However,
increased costs from the vendor or an interruption of supply from this vendor could have a material adverse effect on the Company's profit margins and
profitability.
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Table of Contents
17.
LEGAL MATTERS
As of June 30, 2020, the Company is involved in the following matters described below:
•
As previously reported, the Company has launched a program focused on enforcing its intellectual property and, in particular, certain of its patent
portfolio. The Company has continued to enforce its intellectual property by filing complaints against certain parties alleging infringement on the
Company’s patents relating to its wireless audio technology. In the year ended June 30, 2020, the Company recovered approximately $385,000 of
fees and costs that were involved with the underlying efforts to enforce this portfolio. These costs primarily relate to legal fees, expenses, time and
effort of its management team, and other costs involved with the underlying efforts to enforce certain aspects of its portfolio. 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 may 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.
• 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 Company is currently investigating whether these
allegations have any merit. Depending on the results of the investigation and the defense of these allegations, the ultimate resolution of this matter
may have a material effect on the Company's financial statements. The Company estimates that this matter will ultimately be resolved at a cost of
approximately $20,000 to $200,000 and has accrued the lower amount as of June 30, 2020.
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 Consolidated Financial
Statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
35
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Exhibit No.
EXHIBIT INDEX
Exhibit Description
3.1
3.2
3.3
3.4
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
14
21.1
23.1
31.1
31.2
32.1
32.2
101
Amended and Restated Certificate of Incorporation of Koss Corporation, as in effect on November 19, 2009. Filed as Exhibit 3.1 to
the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2009 and incorporated herein by reference.
By-Laws of Koss Corporation. Filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996
and incorporated herein by reference.
Amendment to the By-Laws of Koss Corporation. Filed as Exhibit 3.3 to the Company’s Current Report on Form 8-K on March 7,
2006 and incorporated herein by reference.
Amendment to the By-Laws of Koss Corporation**
Description of Common Stock of Koss Corporation **
Death Benefit Agreement with John C. Koss. Filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year
ended June 30, 1996 and incorporated herein by reference. *
Stock Purchase Agreement with John C. Koss. Filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year
ended June 30, 1996 and incorporated herein by reference. *
Salary Continuation Resolution for John C. Koss. Filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year
ended June 30, 1996 and incorporated herein by reference. *
1983 Incentive Stock Option Plan. Filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended June 30,
1996 and incorporated herein by reference. *
1990 Flexible Incentive Plan. Filed as Exhibit 25 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1990
and incorporated herein by reference. *
Consent of Directors (Supplemental Executive Retirement Plan for Michael J. Koss dated March 7, 1997). Filed as Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference. *
Credit Agreement dated May 14, 2019, between Koss Corporation and Town Bank Filed as Exhibit 10.1 to the Company’s Form 8-
K on May 16, 2019 and incorporated by reference herein.
General Business Security Agreement dated May 14, 2019, between Koss Corporation and Town Bank Filed as Exhibit 10.2 to the
Company’s Form 8-K on May 16, 2019 and incorporated by reference herein.
Koss Corporation 2012 Omnibus Incentive Plan (Incorporated by reference to Appendix B to Koss Corporation's Definitive Proxy
Statement on Schedule 14A filed on August 27, 2012). *
Koss Corporation Code of Ethics. Filed as Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended June 30,
2011 and incorporated by reference herein.
Subsidiaries of Koss Corporation **
Consent of Wipfli LLP. **
Rule 13a -14(a)/15d-14(a) Certification of Chief Executive Officer. **
Rule 13a -14(a)/15d-14(a) Certification of Chief Financial Officer. **
Section 1350 Certification of Chief Executive Officer. ***
Section 1350 Certification of Chief Financial Officer. ***
The following financial information from Koss Corporation's Annual Report on Form 10-K for the year ended June 30, 2020,
formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2020 and , (ii)
Consolidated Statements of Operations for the years ended June 30, 2020 and 2019, (iii) Consolidated Statements of Cash Flows for
the years ended June 30, 2020 and , (iv) Consolidated Statements of Stockholders' Equity for the years ended June 30, 2020 and
2019 and (v) the Notes to Consolidated Financial Statements.
__________________________
*
**
***
Denotes a management contract or compensatory plan or arrangement
Filed herewith
Furnished herewith
36
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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
By:
/s/ Michael J. Koss
Michael J. Koss
Chairman
Chief Executive Officer
By:
/s/ David D. Smith
David D. Smith
Chief Financial Officer
Principal Accounting Officer
August 27, 2020
August 27, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities indicated on August 27, 2020.
/s/ Michael J. Koss
Michael J. Koss, Director
/s/ Steven A. Leveen
Steven A. Leveen, Director
/s/ William J. Sweasy
William J. Sweasy, Director
/s/ Thomas L. Doerr
Thomas L. Doerr, Director
/s/ Theodore H. Nixon
Theodore H. Nixon, Director
37
AMENDMENT TO THE AMENDED AND RESTATED BY-LAWS OF
KOSS CORPORATION
Exhibit 3.4
Effective August 25, 2020, the Board of Directors of Koss Corporation, a corporation organized and existing under the Delaware General
Corporation Law (the “Corporation”), adopted and approved an amendment to Section 3.01 of the Amended and Restated By-Laws of the Corporation (the
“By-Laws”) in accordance with Section 13.02 thereof. As amended, Section 3.01 of the By-Laws reads in its entirety, as follows:
“Section 3.01. The number of Directors of the Corporation shall be no fewer than four and no greater than twelve.”
DESCRIPTION OF COMMON STOCK OF KOSS CORPORATION
REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
The following information is a summary of information concerning the common stock, par value $0.005 per share (the “Common Stock”), of Koss
Corporation (“we,” “our,” or “us”) and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Amended and
Restated Certificate of Incorporation (the “Certificate of Incorporation”) and our Amended and Restated By-Laws, as amended (the “By-Laws”), each of
which are incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this exhibit is a part.
Authorized Common Stock
The Certificate of Incorporation authorizes the issuance of 20,000,000 shares of Common Stock. Our authorized but unissued shares of Common
Stock are available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which our securities may be listed or traded.
Exhibit 4.1
Voting
Each holder of Common Stock is entitled to one vote for each such share outstanding in the holder’s name. The Certificate of Incorporation does
not provide for cumulative voting by holders of Common Stock in their voting for directors.
Dividends
Holders of Common Stock are entitled to such dividends as may be declared by our board of directors out of funds legally available for such
purpose.
Rights and Preferences
Shares of Common Stock are neither redeemable nor convertible. Holders of Common Stock have no preemptive or subscription rights to
purchase any of our securities.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of Common Stock are entitled to receive, pro rata, our assets which are legally
available for distribution, after payments of all debts and other liabilities.
1
Anti-Takeover Provisions
The provisions of Delaware law, the Certificate of Incorporation and the By-laws could have the effect of delaying, deferring or discouraging
another person from acquiring control of us. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are
also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of
increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to
acquire us because negotiation of these proposals could result in an improvement of their terms.
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law (the “DGCL”), an anti-takeover law. In general, Section 203 prohibits a
Delaware corporation from engaging in any business combination (as defined below) with any interested stockholder (as defined below) for a period of
three years following the date that the stockholder became an interested stockholder, unless:
● prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
● upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the
number of shares of voting stock outstanding (but not the voting stock owned by the interested stockholder) those shares owned by persons who
are directors and officers and by excluding employee stock plans in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange offer; or
● on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not
owned by the interested stockholder.
In general, Section 203 defines “business combination” to include the following:
● any merger or consolidation involving the corporation and the interested stockholder;
● any sale, lease, exchange, mortgage, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested
stockholder;
● subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder;
● subject to limited exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any
class or series of the corporation beneficially owned by the interested stockholder; or
● the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
2
Section 203 generally defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of
the corporation, or who beneficially owns 15% or more of the outstanding voting stock of the corporation at any time within a three-year period
immediately prior to the date of determining whether such person is an interested stockholder, and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
Certificate of Incorporation and By-Laws Provisions
The Certificate of Incorporation and the By-Laws include a number of provisions that could deter hostile takeovers or delay or prevent changes in
control of us. Certain of these provisions are summarized in the following paragraphs.
Effects of authorized but unissued Common Stock. One of the effects of the existence of authorized but unissued Common Stock may be to
enable our board of directors to make more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or
otherwise, and thereby to protect the continuity of management. If, in the due exercise of its fiduciary obligations, the board of directors were to determine
that a takeover proposal was not in our best interest, such shares could be issued by the board of directors without stockholder approval in one or more
transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the
proposed acquirer or insurgent stockholder group, by putting a substantial voting block in institutional or other hands that might undertake to support the
position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.
Cumulative Voting. The Certificate of Incorporation does not provide for cumulative voting in the election of directors, which would allow
holders of less than a majority of the stock to elect some directors.
Director Vacancies. The By-Laws provide that all vacancies may be filled by the Board of Directors.
3
Stockholder Action; Special Meeting of Stockholders. The By-Laws provide that stockholders may act by written consent. However,
stockholders pursuing an action by written consent will be required to comply with certain notice and record date requirements that are set forth in the
DGCL. A special meeting of stockholders may be called by the chairman of the board of directors, the president, the chief executive officer, the chief
operating officer or the board of directors at any time and for any purpose or purposes as shall be stated in the notice of the meeting, or by request of the
holders of record of at least 10% of outstanding shares of Common Stock. This provision could prevent stockholders from calling a special meeting
because, unless certain significant stockholders were to join with them, they might not obtain the percentage necessary to request the meeting. Therefore,
stockholders holding less than 10% of issued and outstanding Common Stock, without the assistance of management, may be unable to propose a vote on
any transaction which may delay, defer or prevent a change of control, even if the transaction were in the best interests of our stockholders.
Listing on the Nasdaq Capital Market
Shares of Common Stock are listed on the Nasdaq Capital Market under the symbol “KOSS.”
4
SUBSIDIARIES OF KOSS CORPORATION
EXHIBIT 21.1
The Company’s consolidated subsidiaries are shown below, together with the state or jurisdiction of organization of each subsidiary and the percentage of
voting securities that the Company owns in each subsidiary.
Name of Subsidiary
Koss U.K. Limited
Koss B.V.
Jurisdiction of
Incorporation or
Organization
United Kingdom
Netherlands
Percent of Outstanding
Voting Securities
Owned
100%
100%
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statement (Nos. 333-89872, 333-37986, 333-20405 and 333-184754) on Form S-8
of our report dated August 27, 2020, relating to the consolidated financial statements of Koss Corporation and Subsidiaries as of and for the years ended
June 30, 2020 and 2019 appearing in this Annual Report on Form 10-K of Koss Corporation for the year ended June 30, 2020.
/s/ WIPFLI LLP
Milwaukee, Wisconsin
August 27, 2020
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Michael J. Koss, certify that:
1. I have reviewed this annual report on Form 10-K of Koss Corporation;
2.
3.
4.
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;
Based on my knowledge, the consolidated 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;
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.
August 27, 2020
/s/ Michael J. Koss
Michael J. Koss
Chief Executive Officer and President
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, David D. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of Koss Corporation;
2.
3.
4.
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;
Based on my knowledge, the consolidated 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;
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.
August 27, 2020
/s/ David D. Smith
David D. Smith
Chief Financial Officer
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
Exhibit 32.1
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 Annual Report on Form 10-K of the Company for the year ended June 30, 2020 (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
Chief Executive Officer and President
August 27, 2020
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.
Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
Exhibit 32.2
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 Annual Report on Form 10-K of the Company for the year ended June 30, 2020 (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
August 27, 2020
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.