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Koss Files Restated Financial Statements, Just in the Nick of Time

As you may recall, restated financial statements for headphonesmith company Koss were due yesterday and they used all the time they were allowed.

According to our friends aty filed its restated 10-K for June 30, 2009, and 10-Qs for September 30, 2009, December 31, 2009 and March 31, 2010 5 pm, 5:06, 5:11, 5:16 and 5:17 respectively.

Oh and they topped everything off with an 8-K at 5:27 that explains the barrage (not that we need it but, you know, securities law and stuff):

On June 30, 2010, Koss Corporation (“Koss”) released restated consolidated financial statements for the fiscal years ended June 30, 2009 and 2008, and the quarter ended September 30, 2009. Koss filed amendments to its Annual Report on Form 10-K for the fiscal year ended June 30, 2009 and its Quarterly Report for the three months ended September 30, 2009 containing the restated consolidated financial statements for the applicable periods. The restatements were required as a result of previously disclosed unauthorized transactions by Sujata Sachdeva, Koss’s former Vice President of Finance and Principal Accounting Officer.

Koss also amended its Quarterly Reports on Form 10-Q for the three months ended December 31, 2009 and March 31, 2010 to include financial statements, which were omitted from the Company’s reports when previously filed. The release of these financial statements was delayed due to the restatement of Koss’s financials statements required by the unauthorized transactions. With the filings of these amended Quarterly Reports on Form 10-Q, Koss understands that it will regain compliance with Nasdaq Listing Rule 5250(c)(1), which requires the timely filing of periodic financial statements.

That about covers it, doesn’t it? Oh right, the actual numbers. We checked in with forensic sleuth and GC friend Tracy Coenen on these and she gave us some perspective on the restated numbers:

So I’ve taken a run through the restated numbers for 6/30/09 and 6/30/08. Very interesting.

2009 – Revenue was understated by $3.5 million to conceal the fraud, while COGS was overstated by $1.7 million. Overall there is now a loss for 2009, thanks to $8.5 million of theft, but without that, the company would have had profits of $8.2 million, or 19.6% on net sales. Wow!

2008 – Revenue was understated by $2.1 million to conceal the fraud, while COGS was overstated by $1 million. Overall there is now a loss of 2008 of $1.3 million thanks to $5.1 million of theft, but without that, the company would have had profits of $10.7 million or 21.9% of sales.

Pretty impressive stuff. Maybe the company was right when they said everything would be hunky-dory once they got this little mishap out of the way. Chief headphone inheritor Michael Koss explains in the company’s press release, “Given that certain unauthorized transactions were concealed in the Company’s sales and cost of sales accounts, our sales were higher and our cost of sales was lower than previously reported in both 2009 and 2008. This correction has revealed an increase in gross margins for our Company. From this perspective, the Company’s performance was actually stronger than originally reported.”

Tracy continues:

What you see is that 65%-75% of the theft on an annual basis was concealed on the P&L, and the remainder was dumped into the balance sheet, via inflated A/R, Inventory, and fixed assets, and understated liabilities. The adjustments on the balance sheet are large by 2009 because those irregularities were cumulative.

So the bottom line is that the company is very profitable, if shareholders could actually count on them to watch over the money and see to it that the profits aren’t all being stolen. My original theory was that Sachdeva was expensing her theft, and that’s true to some extent, but failure to record sales was presented to me later as part of her her scheme, and she also involved the balance sheet which created a cumulative (and messy) problem.

Oh right! Watching the money. Should probably write that one down. Hopefully we’ve all learned a valuable lesson.

When Booking Bogus Revenue, Ideally Your CFO Is the Type to Not Give a Rat’s Ass

James Li and David Chow used to run a shop called Syntax-Brillian Company as the CEO and Chief Procurement Officer respectively. They sold high-def, LCD TVs under the Olevia brand in China. Problem was, they didn’t really sell TVs under the Olevia brand in China. According to the SEC:

[F]rom at least June 2006 through April 2008, Li and Chow engaged in a complex scheme to overstate Syntax’s financial results by publicly reporting significant sales of LCD televisions in China, when in fact the vast majority of these sales never occurred. Li and Chow initially concealed the scheme through the use of fake shipping and sales documents.

Of course, they couldn’t do it alone. They needed a CFO. A CFO who would backdate things when asked and ignore obvious signs of bogus revenue. That man was Wayne Pratt who, from the sounds of it, wasn’t too concerned about ANYTHING:

The SEC alleges that Wayne Pratt, Syntax’s Chief Financial Officer, ignored red flags of improper revenue recognition and participated in preparing backdated documentation that was provided to Syntax’s auditors to support fictitious fiscal 2006 year-end sales. Pratt also ignored indications of impaired assets, agency sales, and potential collectability issues.

So, budding criminals, get on the look out for a guy/gal who is accustomed to shrugging their shoulders and responding “Meh. Whatever.” to your demands. Should work out well for you.

Litigation Release [SEC]
Complaint [SEC]