KOSS CORP 10-Q

Item 1. Financial Statements KOSS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)     December 31, 2020 June 30, 2020 ASSETS Current assets: Cash and cash equivalents $ 4,394,719 $ 3,999,409 Accounts receivable, less allowance for doubtful accounts of $61,099 and $74,082 , respectively 2,543,046 2,317,064 Inventories, net 5,803,014 5,538,794 Prepaid expenses and other current assets 403,126 267,647 Income taxes receivable 10,603 14,622 Total current assets 13,154,508 12,137,536  Equipment and leasehold improvements, net 1,204,641 983,641  Other assets: Operating lease right-of-use assets 2,445,397 2,582,402 Cash surrender value of life insurance 7,139,078 6,876,827 Total other assets 9,584,475 9,459,229  Total assets $ 23,943,624 $ 22,580,406  LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,110,240 $ 827,705 Accrued liabilities 1,054,580 580,099 Deferred revenue 641,215 423,639 Operating lease liability 282,885 276,947 Short-term debt — 506,700 Total current liabilities 3,088,920 2,615,090  Long-term liabilities: Deferred compensation 2,316,482 2,333,482 Deferred revenue 185,118 170,281 Operating lease liability 2,162,513 2,305,455 Total long-term liabilities 4,664,113 4,809,218  Total liabilities 7,753,033 7,424,308  Stockholders' equity: Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 7,447,489 and 7,404,831, respectively 37,237 37,024 Paid in capital 7,281,190 6,882,729 Retained earnings 8,872,164 8,236,345 Total stockholders' equity 16,190,591 15,156,098  Total liabilities and stockholders' equity $ 23,943,624 $ 22,580,406 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)     Three Months Ended Six Months Ended  December 31 December 31  2020 2019 2020 2019 Net sales $ 4,929,789 $ 4,162,659 $ 10,138,084 $ 9,573,421 Cost of goods sold 3,311,892 2,798,572 6,883,960 6,861,880 Gross profit 1,617,897 1,364,087 3,254,124 2,711,541  Selling, general and administrative expenses 1,615,824 1,586,705 3,121,595 3,251,305  Income (loss) from operations 2,073 (222,618) 132,529 (539,764)  Other income 506,700 — 506,700 — Interest income 2,660 6,927 609 13,324  Income (loss) before income tax provision 511,433 (215,691) 639,838 (526,440)  Income tax provision 2,543 22 4,019 22  Net income (loss) $ 508,890 $ (215,713) $ 635,819 $ (526,462)  Income (loss) per common share: Basic $ 0.07 $ (0.03) $ 0.09 $ (0.07) Diluted $ 0.07 $ (0.03) $ 0.09 $ (0.07)  Weighted-average number of shares: Basic 7,405,758 7,404,831 7,405,295 7,404,831 Diluted 7,453,450 7,404,831 7,424,239 7,404,831 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)     Six Months Ended  December 31  2020 2019 Operating activities: Net income (loss) $ 635,819 $ (526,462) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for (recovery of) doubtful accounts 8,108 (13,338) Depreciation of equipment and leasehold improvements 153,559 189,138 Stock-based compensation expense 309,756 284,894 Deferred income taxes — 11,650 Change in cash surrender value of life insurance (158,521) (145,605) Change in deferred compensation accrual 58,000 37,016 Deferred compensation paid (75,000) (75,000) Other income - SBA loan forgiveness (506,700) — Net changes in operating assets and liabilities: Accounts receivable (234,090) 1,200,714 Inventories (264,220) 150,137 Prepaid expenses and other current assets (135,479) (100,724) Income taxes receivable 4,019 (10,569) Accounts payable 282,535 (607,099) Accrued liabilities 474,481 111,312 Deferred revenue 232,413 (153,076) Net cash provided by operating activities 784,680 352,988  Investing activities: Purchase of equipment and leasehold improvements (374,558) (239,392) Life insurance premiums paid (103,730) (112,794) Net cash (used in) investing activities (478,288) (352,186)  Financing activities: Proceeds from exercise of stock options 88,918 — Net cash provided by financing activities 88,918 —  Net increase in cash and cash equivalents 395,310 802 Cash and cash equivalents at beginning of period 3,999,409 2,228,282 Cash and cash equivalents at end of period $ 4,394,719 $ 2,229,084 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)      Six Months Ended December 31, 2020  Common Stock Paid in Retained  Shares Amount Capital Earnings Total Balance, June 30, 2020 7,404,831 $ 37,024 $ 6,882,729 $ 8,236,345 $ 15,156,098 Net income — — — 635,819 635,819 Stock-based compensation expense — — 309,756 — 309,756 Stock option exercises 42,658 213 88,705 — 88,918 Balance, December 31, 2020 7,447,489 $ 37,237 $ 7,281,190 $ 8,872,164 $ 16,190,591      Six Months Ended December 31, 2019  Common Stock Paid in Retained  Shares Amount Capital Earnings Total Balance, June 30, 2019 7,404,831 $ 37,024 $ 6,333,135 $ 8,701,942 $ 15,072,101 Net (loss) — — — (526,462) (526,462) Stock-based compensation expense — — 284,894 — 284,894 Balance, December 31, 2019 7,404,831 $ 37,024 $ 6,618,029 $ 8,175,480 $ 14,830,533      Three Months Ended December 31, 2020  Common Stock Paid in Retained  Shares Amount Capital Earnings Total Balance, September 30, 2020 7,404,831 $ 37,024 $ 7,035,723 $ 8,363,274 $ 15,436,021 Net income — — — 508,890 508,890 Stock-based compensation expense — — 156,762 — 156,762 Stock option exercises 42,658 213 88,705 — 88,918 Balance, December 31, 2020 7,447,489 $ 37,237 $ 7,281,190 $ 8,872,164 $ 16,190,591      Three Months Ended December 31, 2019  Common Stock Paid in Retained  Shares Amount Capital Earnings Total Balance, September 30, 2019 7,404,831 $ 37,024 $ 6,481,323 $ 8,391,193 $ 14,909,540 Net (loss) — — — (215,713) (215,713) Stock-based compensation expense — — 136,706 — 136,706 Balance, December 31, 2019 7,404,831 $ 37,024 $ 6,618,029 $ 8,175,480 $ 14,830,533  The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents KOSS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2020 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) BASIS OF PRESENTATION 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. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The operating results for any interim period are not necessarily indicative of the operating results that may be experienced for the full fiscal year. Certain information and footnote disclosure normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 . The preparation of financial statements in conformity with U.S. GAAP requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, income tax valuation allowance , non-cash stock-based compensation and deferred compensation. Actual results could differ from the Company's estimates. B) INCOME TAXES 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. 2. INVENTORIES The components of inventories were as follows:     December 31, 2020 June 30, 2020 Raw materials $ 1,914,825 $ 1,953,031 Finished goods 5,514,332 5,149,200 Inventories, gross 7,429,157 7,102,231 Reserve for obsolete inventory (1,626,143) (1,563,437) Inventories, net $ 5,803,014 $ 5,538,794   7 Table of Contents 3. 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 a $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. 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. 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 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 .   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:    Three Months Ended Six Months Ended  December 31, December 31,  2020 2019 2020 2019 United States $ 3,652,303 $ 3,101,873 $ 7,598,576 $ 7,642,012 Export 1,277,486 1,060,786 2,539,508 1,931,409 Net Sales $ 4,929,789 $ 4,162,659 $ 10,138,084 $ 9,573,421  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 $ 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 . The Company estimates that the deferred revenue performance obligations are satisfied within one to three years and therefore uses that same time frame for recognition of the deferred revenue. 8 Table of Contents 5. INCOME (LOSS) PER COMMON AND COMMON STOCK EQUIVALENT SHARE Basic income (loss) per share is computed based on the weighted-average number of common shares outstanding. 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,  2020 2019 2020 2019 Numerator Net income (loss) $ 508,890 $ (215,713) $ 635,819 $ (526,462)  Denominator Weighted average shares, basic 7,405,758 7,404,831 7,405,295 7,404,831 Dilutive effect of stock compensation awards (1) 47,692 — 18,944 — Diluted shares 7,453,450 7,404,831 7,424,239 7,404,831  Net income (loss) attributable to common shareholders per share: Basic $ 0.07 $ (0.03) $ 0.09 $ (0.07) Diluted $ 0.07 $ (0.03) $ 0.09 $ (0.07) (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.  6 . 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. 9 Table of Contents 7. LEGAL MATTERS 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. , Bose Corporation, PEAG, LLC d/b/a JLab Audio, Plantronics, Inc. and Polycom, Inc., and Skullcandy, Inc . The complaints allege infringement on the Company’s patents relating to its wireless audio technology. 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.  • Early in fiscal year 2020 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 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 Condensed Consolidated Financial Statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.    CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and possible litigation and assumptions relating to the foregoing. In addition, when used in this Form 10-Q, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “may,” “will,” “should,” “could,” “would,” “forecasts,” “predicts,” “potential,” “continue” and variations thereof and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this Form 10-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, but are not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, the receptivity of consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition, pricing, the number and nature of customers and their product orders, production by third party vendors, foreign manufacturing, sourcing, and sales (including foreign government regulation, trade and importation concerns), 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 in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 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. 10 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview The Company developed stereo headphones in 1958 and has been recognized as a leader in the industry ever since. Koss markets a complete line of high-fidelity headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling headphones. The Company operates as one business segment, as its principal business line is the design, manufacture and sale of stereo headphones and related accessories.   Financial Results 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  December 31 December 31 Financial Performance Summary 2020 2019 2020 2019 Net sales $ 4,929,789 $ 4,162,659 $ 10,138,084 $ 9,573,421 Net sales increase (decrease) % 18.4% (23.1)% 5.9% (14.5)% Gross profit $ 1,617,897 $ 1,364,087 $ 3,254,124 $ 2,711,541 Gross profit as % of net sales 32.8% 32.8% 32.1% 28.3% Selling, general and administrative expenses $ 1,615,824 $ 1,586,705 $ 3,121,595 $ 3,251,305 Selling, general and administrative expenses as % of net sales 32.8% 38.1% 30.8% 34.0% Interest income $ 2,660 $ 6,927 $ 609 $ 13,324 Other income $ 506,700 — 506,700 — Income (loss) before income tax provision $ 511,433 $ (215,691) $ 639,838 $ (526,440) Income (loss) before income tax as % of net sales 10.4% (5.2)% 6.3% (5.5)% Income tax provision $ 2,543 $ 22 $ 4,019 $ 22 Income tax provision as % of income (loss) before income tax 0.5% (0.0)% 0.6% (0.0)%  11 Table of Contents 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 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 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. As previously reported, the Company has launched a program focused on enforcing its intellectual property and, in particular, certa in of its patent portfolio. The Company has continued to enforce its intellectual property by filing complaints against certain parties alleging infringement on the Co mpany’s patents relating to its wireless headphone technology. 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. 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 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. 12 Table of Contents COVID-19 Impact  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. 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. This has resulted in a decline in business across our m arkets with the exception of on line retail. The Company expects these negative sales impacts to continue until markets re-open and consumer spending returns to normal. 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. 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. 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; (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, 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 Cash Flows 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): 2020 2019 Operating activities $ 784,680 $ 352,988 Investing activities (478,288) (352,186) Financing activities 88,918 — Net increase in cash and cash equivalents $ 395,310 $ 802  Operating Activities 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. 13 Table of Contents  Investing Activities 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 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.  Liquidity The Company's capital expenditures are primarily for leasehold improvements and tooling. In addition, it has interest payments on its borrowings when it uses its line of credit facility. The Company believes that cash generated from operations, together with cash reserves and available borrowings, provide it with adequate liquidity to meet operating requirements, debt service requirements and planned capital expenditures for the next twelve months and thereafter for the foreseeable future. The Company regularly evaluates new product offerings, inventory levels and capital expenditures to ensure that it is effectively allocating resources in line with current market conditions. Credit Facility On May 14, 2019, the Company entered into a secured credit facility ("Credit Agreement") with Town Bank (“Lender”) for a two-year term expiring on May 14, 2021. The Credit Agreement provides for a $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. 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. The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type. The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions. The Company is currently in compliance with all covenants related to the Credit Agreement. As of December 31, 2020, and June 30, 2020, there were no outstanding borrowings on the facility.  Contractual Obligation 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.  Off-Balance Sheet Transactions At December 31, 2020, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.  14 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.