What changed in this filing

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Item 1. Financial Statements

2021-01-29 compared with 2020-11-05 · 109 added, 95 removed, 238 unchanged (46% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

September 30, 2020

December 31, 2020

June 30, 2020

27 unchanged sentences

Common stock, $0.005 par value, authorized 20,000,000 shares;

issued and outstanding 7,404,831

issued and outstanding 7,447,489 and 7,404,831, respectively

Paid in capital

6 unchanged sentences

Three Months Ended

Six Months Ended

Cost of goods sold

1 unchanged sentence

Income (loss) from operations

Interest (expense) income

Interest income

Income (loss) before income tax provision

6 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Three Months Ended

Six Months Ended

Operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash (used in) operating activities:

Provision for doubtful accounts

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Provision for (recovery of) doubtful accounts

Depreciation of equipment and leasehold improvements

4 unchanged sentences

Deferred compensation paid

Other income - SBA loan forgiveness

Net changes in operating assets and liabilities:

5 unchanged sentences

Deferred revenue

Net cash (used in) operating activities

Net cash provided by operating activities

Investing activities:

2 unchanged sentences

Net cash (used in) investing activities

Net (decrease) in cash and cash equivalents

Financing activities:

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 period

4 unchanged sentences

EQUITY (Unaudited)

Three Months Ended September 30, 2020

Six Months Ended December 31, 2020

Balance, June 30, 2020

Stock-based compensation expense

Balance, September 30, 2020

Three Months Ended September 30, 2019

Stock option exercises

Balance, December 31, 2020

Six Months Ended December 31, 2019

Balance, June 30, 2019

Stock-based compensation expense

Balance, December 31, 2019

Three Months Ended December 31, 2020

Balance, September 30, 2020

Stock-based compensation expense

Stock option exercises

Balance, December 31, 2020

Three Months Ended December 31, 2019

Balance, September 30, 2019

Stock-based compensation expense

Balance, December 31, 2019

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

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30 , 2020

December 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A) BASIS OF PRESENTATION

The condensed consolidated balance sheet as of September 30 , 2020, the condensed consolidated statements of op erations for the three months ended September 30 , 2020 and 2019 , the condensed consolidated state ments of cash flows for the three months ended September 30 , 2020 and 2019, and the condensed consolidated statements of stockholders ' equity for the three months ended September 30 , 2020 and 2019, have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“U.S.

The condensed consolidated balance sheet as of December 31 , 2020, the condensed consolidated statements of op erations for the three and six months ended December 31 , 2020 and 2019 , the condensed consolidated state m ents of cash flows for the six months ended December 31 , 2020 and 2019, and the condensed consolidated statements of stockholders ' equity for the three and six months ended December 31 , 2020 and 2019, have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“U.S.

GAAP”) and have not been audited.

9 unchanged sentences

B) INCOME TAXES

A state tax provision of $ 1,477 was recorded during the three months ended September 30 , 2020 , for states where there is no net operating loss carryforward .

There was no state tax provision for the three months ended September 30 , 2019.

Utilization of net operating tax carryforwards and a full valuation allowance against deferred tax assets reduced the federal income tax expense to zero for the three months ended September 30 , 2020 and 2019 .

In states with net operating loss carryforward, utilization of net operating tax carryforwards and a full valuation allowance against deferred tax assets reduced the state income tax expense to zero for the three months ended September 30, 2020 and 2019.

A state tax provision of $ 2,543 and $4,019 was recorded for the three and six months ended December 31 , 2020 , respectively, for states where there is no net operating loss carryforward .

F or the three and six months ended December 31 , 2019 , the state tax provision was $22 .

In states with net operating loss carryforward s , utilization of net operating tax carryforwards and a full valuation allowance against deferred tax assets reduced the state income tax expense to zero for the three and six months ended December 31 , 2020 and 2019.

Utilization of net operating tax carryforwards and a full valuation allowance against deferred tax assets reduced the federal income tax expense to zero for the three and six months ended December 31, 2020 and 2019.

C) OTHER INCOME

On November 3 , 2020, the Company was notified that the full $506,700 of the SBA Loan (see Note 3) was forgiven.

The loan f orgiveness has been treated as other i ncome and shown as a separate line on the Condensed Consolidated Statement s of Operations.

The Company followed the debt and debt extinguishment accounting model for the SBA Loan forgiveness.

The components of inventories were as follows:

September 30, 2020

December 31, 2020

June 30, 2020

9 unchanged sentences

There are no unused line fees in the credit facility.

On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50% .

The Company and the Lender also entered into a General Business Security Agreement dated May 14, 2019 under which the Company granted the Lender a security interest in substantially all of the Company’s assets in connection with the Company’s obligations under the Credit Agreement.

1 unchanged sentence

The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions.

The Company is currently in compliance with all covenants related to the Credit Agreement.

As of September 30 , 2020, and June 30, 2020 , 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 (the “PPP”) 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 f orgiveness as permitted under the PPP on August 7, 2020, for the full amount of the SBA Lo an using the 24 - week “Covered P eriod ”

under the PPP , which is why the debt is classified as short-term on the consolidated balance sheet .

On November 3, 2020, the Company was notified that the full principal amount of $506,700 has been forgiven (see Note 8).

As of December 31, 2020, the Company was in compliance with all covenants related to the Credit Agreement.

As of December 31, 2020, and June 30, 2020, there were no outstanding borrowings on the facility.

On April 13, 2020, the Company received an unsecured loan (the "SBA Loan") for $506,700 under the Small Business Administration ("SBA") Paycheck Protection Program (the “PPP”) of the CARES Act through Town Bank.

On November 3, 2020, the Company was notified that the full principal amount of $506,700 has been forgiven and is recorded as other income in the Condensed Consolidated Statement of Operations .

REVENUE RECOGNITION

2 unchanged sentences

Three Months Ended

September 30,

Six Months Ended

United States

1 unchanged sentence

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 $111,030 and $ 158,053 in the three months ended September 30 , 2020 and 2019, respectively, for performance obligations related to consumer and customer warranties.

The Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $ 200,424 and $ 278,577 in the six months ended December 31 , 2020 and 2019, respectively, for performance obligations related to consumer and customer warranties.

The deferred revenue liability was $8 08,488 as of June 30, 2019 .

2 unchanged sentences

Basic income (loss) per share is computed based on the weighted-average number of common shares outstanding.

Diluted income per common share is calculated assuming the exercise of stock options except where the result would be anti-dilutive.

The following table reconciles the numerator and denominator used to calculate basic and diluted income per share:

Three Months Ended September 30,

Diluted income (loss) 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 (loss) per share:

Three Months Ended December 31,

Six Months Ended December 31,

Net income (loss)

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

(1) Excludes approximately 2,750,176 and 2,775,321 weighted average stock options for the three months ended September 30, 2020 and 2019, respectively, as the impact of such awards was anti-dilutive.

(1) Excludes approximately 2,490,061 and 2,842,875 weighted average stock options for the three months ended December 31 , 2020 and 2019, respectively, as the impact of such awards was anti-dilutive.

For the six months ended December 31, 2020 and 2019, 2,564,584 and 2,809,098 weighted average stock options were excluded, respectively.

The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly-owned by the former Chairman.

3 unchanged sentences

LEGAL MATTERS

As of September 30, 2020, the Company is involved in the following matters described below:

As of December 31 , 2020, the Company is involved in the following matters described below:

In July 2020, the Company filed complaints in United States District Court against each of Apple Inc.

11 unchanged sentences

Although management currently believes that resolving these claims against us, individually or in aggregate, will not have a material adverse impact on our Condensed Consolidated Financial Statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

SUBSEQUENT EVENTS

On November 3, 2020, the Company was notified that the SBA has forgiven the SBA Loan in the amount of $506,700 , which represents the full outstanding principal of the loan.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

26 unchanged sentences

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

The Company developed stereo headphones in 1958 and has been a leader in the industry ever since.

The Company developed stereo headphones in 1958 and has been recognized as a leader in the industry ever since.

Koss markets a complete line of high-fidelity headphones, wireless Bluetooth®

2 unchanged sentences

The Company operates as one business segment, as its principal business line is the design, manufacture and sale of stereo headphones and related accessories.

Results of Operations Summary

Net sales for the quarter ended September 30 , 2020, decreased $ 202,467 to $ 5,208,295 , compared to the same quarter last year.

Gross pro fit as a percent of net sales in creased to 31.4% for the three months ended September 30 , 2020 compared to 24.9% for the same quarter last year.

Gross profit fluctuations were primarily driven by a change in the mix of business by product, customer and sales channel.

A significant factor in the three month increase was a large back-to-school sale to a domestic retailer at low margin in the quarter ended September 30, 2019.

Selling, general and administrative expenses for the three months ended September 30, 2020, de creased approximately 10 % due to lower leg al fees and employee benefits.

Tax expense for the three months ended September 30 , 2020 was minimal due to an offsetting change in the valuation allowance for deferred tax assets.

Financial Results

The following table presents selec ted financial data for the first quarter of fiscal year 2021 :

The following table presents selec ted financial data for the three and six months ended December 31, 2020 and 2019 :

Three Months Ended

Six Months Ended

Financial Performance Summary

Net sales (decrease) %

Net sales increase (decrease) %

Gross profit as % of net sales

1 unchanged sentence

Selling, general and administrative expenses as % of net sales

Interest (expense) income

Interest income

Income (loss) before income tax provision

2 unchanged sentences

Income tax provision as % of income (loss) before income tax

Quarter Ended September 30, 2020 Results Compared with September 30, 2019

For the three mon ths ended September 30 , 2020, net sales declined 3.7% , primarily due to a decrease in sales to a US based mass retailer.

Sales in the export markets and other domestic markets increased.

Net sales in the domestic market were approximately $3,952 ,000 in the three months ended September 30 , 2020, compared to approximately $4,501 ,000 last year.

S ales to mass retail custom ers decreased approximately $809 ,000 in the three months ended September 30 , 2020 .

Mass retail net sales included a large back-to-school promotion in the three months ended September 30 , 2019 .

Sales through online channels increased significantly in the three months ended September 30 , 2020.

The online sales activity was driven by the COVID-19 directives, which have caused many people to work and study remotely and have resulted in sales of communication headsets to facilitate that work and study.

C ertain domestic distributors had high er sales in the three months ended September 30 , 2020 , due to COVID-19 related customer demand.

Export net sales increased 38 % to approximately $1,257 ,000 for the three months ended September 30 , 2020, compared to approximately $909 ,000 for the same period last year.

2020 Results Compared with 2019

( comments refer to both the three and six month periods ended December 31 unless otherwise noted)

For the three and six mon ths ended December 31 , 2020, net sales increased 18 .4 % and 5.9 %, respectively.

This improvement in net sales was driven by increased sales to certain US distributors , acceleration of online sales and increased sales in Europe.

Net sales in the domestic market were approximately $3,6 52 ,000 in the three months ended December 31 , 2020, compared to approximatel y $3,102 ,000 in the prior year period .

Domestic net sales were approximately $7,599,000 in the six months ended December 31, 2020 compared to $7,642,000 in the prior year period .

Growth in the online sales channels and certain US-based distributors increased while sales in the mass retail and educational channels declined.

Sales through online channels incre ased by approximately 2.5 times compared to the prior year three month and six month periods .

The online sales activity was driven by COVID-19 directives, which have caused many people to work and study remotely and have resulted in sales of communication headsets to facilitate that work and study.

C ertain domestic distributors had high er sales due to COVID-19 related customer demand.

Sales to mass retail customers decreased due to reduced product placement.

In addition, mass retail net sales included a large back-to-school promotion in the six months ended December 31, 2019 that did not take place in 2020 .

Net sales in the educational markets, which primarily are driven by the need for headphones in testing services, declined as a result of timing of shipments.

There were large shipments at the end of our fiscal year ended June 30, 2020.

Export net sales increased 20 .4 % to approximately $1,27 7 ,000 for the three months ended December 31 , 2020, compared to approximately $1,061,000 for the same period last year.

Net sales to export markets were approximately $2,539,000 in the six months ended December 31, 2020 compar ed to $1,931,000 in the prior year period.

Sales to distributors in Europe were the primary drivers for the in crease.

A significant portion of the increase was related to introduction of new products as well as increased sales of headphones used for working and studying remotely.

Gross profit increased to 31.4% for the three months ended September 30 , 2020, compared to 24.9% for the three months ended September 30 , 2019.

The high er gross profit in the current year was largely due to the promotional back-to-school sale to a domestic mass retail customer at very low margin in the three months ended September 30, 2019 .

In addition, sales in the current quarter reflected a much more favorable mix of sales by market and product.

Selling, general and administrative expenses for the three months ended September 30 , 2020, de creased approximately $1 59 ,000 or 9.5 % compared to the prior year period .

The primary factors were a de crease in legal and profes siona l fees of approximately $87 ,000 and a de crease in employee benefit costs of approximately $47 ,000 .

The legal and professional fees decreas e was caused by low er legal and professional fees related to the Company's intellectual property portfolio .

The employee benefit costs were low er due to a de crease in the Company ’s match ing contributin for its 401(k) plan .

Income tax expense for the three months ended September 30, 2020, was comprised of the U.S.

Gross profit increased to 32.1% for the six months ended December 31 , 2020, compared to 28.3 % for the six months ended December 31 , 2019 .

Sales in the current year reflected a much more favorable mix by markets and products.

The high er gross profit in the current year was partially due to the promotional back-to-school sale to a domestic mass retail customer at very low margin in the six months ended December 31 , 2019 .

Selling, general and administrative expenses for the three months ended December 31 , 2020, increased approximately $29,000 or 1.8 % compared to the prior year period .

The primary factor s w ere an increase in employee compensation costs, deferred compensation expenses and general insurance.

These costs were partially offset by lower legal expenses .

For the six months ended December 31, 2020, selling, general and administrative expenses decreased 4% or approximately $129,000 compared to the same period last year.

Lower legal expenses were partially offset by higher general insurance premiums.

Income tax expense for the three and six months ended December 31 , 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 effe ctive tax rate was less than 1 % in the three months ended September 30, 2020 and 2019 .

The effe ctive tax rate was less than 1 % in the three and six months ended December 31 , 2020 and 2019 .

It is anticipated that the effective rate in the current year and future years will be reduced by utilization of a portion or all of the approximately $897,000 of federal net operating loss carryforwards.

4 unchanged sentences

Additionally, in the e vent that a monetary award or judgment is received by the Company in connection with these complaint s, all or portions of such amou n t s may be due to third parties.

The Company believes that it’s financial position remains strong.

The Company had $3.4 million of cash and available credit facilities of $5.0 million on September 30, 2020.

The Company believes that its financial position re mains strong.

The Company had $4.3 million of cash and available credit facilities of $5.0 million on December 31 , 2020.

COVID-19 Impact

1 unchanged sentence

Business plans are being executed to maintain supply of the Company’s products to our customers throughout the world.

The Company’s financial results for the quarter ended September 30 , 2020 were positively impacted by the demand for specific communication headphones as more people were working from home and studying online due to COVID-19 related directives .

The increased domestic sales for these specific products in the quarter ended September 30 , 2020 resulted in shortages of certain products, which will take a c ouple months to replenish.

The Company’s financial results for the quarter ended December 31 , 2020 were positively impacted by the demand for specific communication headphones as more people were working from home and studying online due to COVID-19 related directives .

The increased domestic sales for these specific products in the quarter ended December 31 , 2020 resulted in shortages of certain products, which will take a c ouple months to replenish.

However, c ertain retail businesses throughout the Company’s markets have seen continued disruption.

1 unchanged sentence

The Company expects these negative sales impacts to continue until markets re-open and consumer spending returns to normal.

The magnitude of the COVID-19 pande mic, including the extent of its 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 ultimate magnitude of the COVID-19 pande mic, including the extent of its impact on the Company’s business, financial position, results of operations or liq uidity, 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.

1 unchanged sentence

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 executing business plans, which include, but are not limited to:

Until recently, t hese disruptions had little on-going impact.

In the most recent quarter, the Company began experiencing extended lead times caused by shortages of ceratin key components.

The re have also been impacts to the movement of new product introductions and costs.

The Company is monitoring the situation closely and the supp ly chain team has mod ified business plans, which include, but are not limited to:

(1) increasing the investment in inventory;

(2) being alert to potential short supply situations;

(2) accelerating delivery times from key suppliers;

(3 ) assisting suppliers with acquisition of critical components;

and (4) utilizing alternative sources and/or air freight.

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.

They include increased frequency of cleaning and disinfecting of facilities, social distancing practices, remote working when possible, restrictions on business travel, holding certain events virtually and limitations on visitor access to facilities.

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.

Liquidity and Capital Resources

The following table summarizes cash flows from operating, investing and f inancing activities for the three months ended September 30 , 2020 and 2019:

Total cash (used in):

The following table summarizes cash flows from operating, investing and financing activities for the six months ended December 31, 2020 and 2019:

Total cash provided by (used in):

Operating activities

1 unchanged sentence

Financing activities

Net (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Operating Activities

The in crease in accounts receivable and prepaid assets wer e the driving factors for the in crease in cash used in oper ating activities during the three months ended September 30 , 2020.

The impact of these factors was partially offset by an increase in accounts payable and accrued liabilities as well as a decrease in inventories.

The increase in income from operations was the driving factor for the increase in cash provided by operating activities during the six months ended December 31, 2020.

The impact of the increased income from operations was partially offset by a decrease in the net changes in operating assets and liabilities.

Investing Activities

Cash used in investing activ ities was higher for the three months ended September 30 , 2020, as the Company had increased expenditures for leasehold improvements and for tooling related to new product introductions.

During the fiscal year ending June 30, 2021 , the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures of ap proximately $600,000 .

Cash used in investing activities was higher for the six months ended December 31, 2020, as the Company had increased expenditures for leasehold improvements and for tooling related to new product introductions.

During the fiscal year ending June 30, 2021, the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures of approximately $600,000.

The Company expects to generate sufficient cash flow through operations or through the use of its available cash and its credit facility to fund these expenditures.

Financing Activities

As of September 30 , 2020, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the quarters ended September 30, 2020 or 2019 under the stock rep urchase program.

No stock options were exercised in the quarters ended September 30, 202 0 or 2019 .

As of December 31, 2020, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the quarters ended December 31, 2020 or 2019 under the stock repurchase p rogram.

Cash provided in 2020 was from stock options exercised which resulted in the issuance of 42,658 shares of common stock.

No stock options were exercised in 2019.

The Company's capital expenditures are primarily for leasehold improvements and tooling.

2 unchanged sentences

The Company regularly evaluates new product offerings, inventory levels and capital expenditures to ensure that it is effectively allocating resources in line with current market conditions.

Credit Facility and SBA Loan

Credit Facility

On May 14, 2019, the Company entered into a secured credit facility ("Credit Agreement") with Town Bank (“Lender”) for a two-year term expiring on May 14, 2021.

2 unchanged sentences

There are no unused line fees in the credit facility.

On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50%.

2 unchanged sentences

The Company is currently in compliance with all covenants related to the Credit Agreement.

As of September 30 , 2020, and June 30, 2020 , there were no outstanding borrowings on the facility.

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 as permitted under the PPP on August 7, 2020, of the full amount of the SBA Lo an using the 24 - week “Cove red P eriod ”

under the PPP .

The Company expects that the full principal amount of the loan will be forgiven.

On November 3, 2020, the Company was notified that the full principal amount of $506,700 has been forgiven.

As of December 31, 2020, and June 30, 2020, there were no outstanding borrowings on the facility.

Contractual Obligation

4 unchanged sentences

Off-Balance Sheet Transactions

At September 30, 2020, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

At December 31, 2020, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements