Koss Corp. will pocket revenue from its increased sales–along with the proceeds of a settlement with American Express. It has also found a new distributor after its online sales declined.

KOSS CORP. (symbol KOSS on Nasdaq; www.koss.com) began operating in 1958 when founder John C. Koss developed the first high-fidelity stereo headphones for consumers. The Koss family owns 78.06% of the stock. The name no doubt brings back warm memories for baby-boom audiophiles, since Koss was a top brand in the stereo music boom of the 1960s and 1970s.

Stereo headphones now account for about 85% of the company’s sales. The remaining 15% comes from Bluetooth wireless speakers, computer headsets and related audio equipment. The company sells most of these products under the Koss brand.

In December 2009, Koss’s former vice president of finance Sujata “Sue” Sachdeva was charged with fraud in U.S. federal court for embezzling $34 million from the company. She was later sentenced to 11 years in prison. As a result of the fraud, Koss has now restated five years of financials.

In February 2016, Koss finally settled a lawsuit against American Express that contended the credit card company delayed exposing Sachdeva’s embezzlement in an effort to profit from her lavish spending. Koss will now receive a gross payment of $3 million, although it will have to pay its legal fees out of that settlement amount.

Penny Stocks: Koss faces strong competitor in Apple headphones

In its fiscal 2016 second quarter, which ended December 31, 2015, Koss’s overall sales rose 2.7%, to $7.2 million from $7.0 million a year earlier. Sales in the U.S. (about 70% of the total) fell due to the loss of a major distributor and lower online sales. However, sales in Asia improved with the addition of a new retail partner.

Koss’s earnings in the quarter jumped 133.5%, to $386,632, or $0.05 a share. That’s up from $165,586, or $0.02. The increase is partly due to the launch of new products that generate higher profits than older models.

The company spends around 4% of its sales on research. It holds cash of $2.1 million, or $0.29 a share. It has no long-term debt.

Koss will probably earn $0.10 a share in 2016, and the stock trades at 21.5 times its forecast. This is a high multiple for a tiny ($16.3 million market cap) company in a highly competitive, fast-changing industry. One particularly strong competitor is Apple Inc., and its popular line of Beats headphones. Apple is one of the world’s biggest companies, with a market capitalization of $564.8 billion.

A tiny, family-owned company such as Koss can still survive with that kind of competition. But it’s hard to see how it can grow enough to justify the risk to outside investors.

TSI Network recommendation: SELL

For our advice on how to choose the right growth stocks for your portfolio, read How to make better growth stock picks.

For our report on a category of growth stocks with questionable appeal, read Why Canadian marijuana stocks are something you should forget about.