What changed in this filing

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Item 1. Financial Statements

2021-05-13 compared with 2021-01-29 · 125 added, 101 removed, 246 unchanged (48% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

December 31, 2020

March 31, 2021

June 30, 2020

36 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of goods sold

Selling, general and administrative expenses

Income (loss) from operations

(Loss) income from operations

Interest income

Income (loss) before income tax provision

(Loss) income before income tax provision

Income tax provision

Net income (loss)

Income (loss) per common share:

Net (loss) income

(Loss) income per common share:

Weighted-average number of shares:

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six Months Ended

Nine Months Ended

Operating activities:

Net income (loss)

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

Provision for (recovery of) doubtful accounts

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

Recovery of doubtful accounts

Depreciation of equipment and leasehold improvements

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Deferred revenue

Net cash provided by operating activities

Net cash (used in) provided by operating activities

Investing activities:

5 unchanged sentences

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

4 unchanged sentences

EQUITY (Unaudited)

Six Months Ended December 31, 2020

Nine Months Ended March 31, 2021

Balance, June 30, 2020

1 unchanged sentence

Stock option exercises

Balance, December 31, 2020

Six Months Ended December 31, 2019

Balance, March 31, 2021

Nine Months Ended March 31, 2020

Balance, June 30, 2019

Stock-based compensation expense

Balance, March 31, 2020

Three Months Ended March 31, 2021

Balance, December 31, 2020

Three Months Ended December 31, 2020

Balance, September 30, 2020

Stock-based compensation expense

Stock option exercises

Balance, March 31, 2021

Three Months Ended March 31, 2020

Balance, December 31, 2019

Three Months Ended December 31, 2019

Balance, September 30, 2019

Stock-based compensation expense

Balance, December 31, 2019

Balance, March 31, 2020

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

March 31, 2021

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.

The condensed consolidated balance sheet s as of March 31 , 2021 and June 30, 2020 , the condensed consolidated statements of op erations for the three and nine months ended March 31 , 2021 and 2020 , the condensed consolidated state m ents of cash flows for the nine months ended March 31 , 2021 and 2020 , and the condensed consolidated statements of stockholders ' equity for the three and nine months ended March 31 , 2021 and 2020 , 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.

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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.

A state tax provision of $ 49 and $4,0 68 was recorded for the three and nine months ended March 31 , 2021 , respectively, for states where there is no net operating loss carryforward .

F or the three and nine months ended March 31 , 2020 , the state tax provision was $ 6,104 and $6,125 , respectively .

T he federal income tax expense was zero for the three and nine months ended March 31, 2021 and 2020 .

In the three months ended March 31, 2021, stock option exercises resulted in tax deductible compensation expense of approximately $2 9 , 3 00,000 .

The deduction of this stock option exercise compensation expense will cause a tax loss in the year ended June 30, 2021, which will be carried forward to future tax years.

The expected tax loss carryforward will create a deferred tax asset of approximately $7,400,000 .

The future realization of this deferred tax asset is uncertain.

The valuat ion allowance was increased to fully offset the deferred tax asset.

C) OTHER INCOME

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

In the three months ended March 31, 2021, the Company received

$378,805 from a directo r in settlement of a short sale under Rule 144.

The components of inventories were as follows:

December 31, 2020

March 31, 2021

June 30, 2020

12 unchanged sentences

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.

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

As of March 31, 2021 , the Company was in compliance with all covenants related to the Credit Agreement.

As of March 31, 2021 , 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.

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine 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 $ 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 Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $ 271,179 and $ 367,198 in the nine months ended March 31 , 2021 and 2020 , 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.

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,

Net income (loss)

(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 (loss) income per share:

Three Months Ended March 31,

Nine Months Ended March 31,

Net (loss) income

Weighted average shares, basic

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Diluted shares

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

(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.

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

(1) Excludes approximately 2,226,184 and 2,802,765 weighted average stock options for the three months ended March 31, 2021 and 2020 , respectively, as the impact of such awards was anti-dilutive.

For the nine months ended March 31, 2021 and 2020, 0 and 2,807,002 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.

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LEGAL MATTERS

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

As of March 31 , 2021 , 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.

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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,”

In addition, when used in this Form 10-Q, the words “aims,”

“anticipates,”

“believes,”

3 unchanged sentences

“plans,”

“thinks,”

“may,”

“will,”

“shall,”

“should,”

19 unchanged sentences

Financial Results

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

The following table presents selected financial data for the three and nine months ended March 31, 2021 and 2020:

Three Months Ended

Six Months Ended

Nine Months Ended

Financial Performance Summary

Net sales increase (decrease) %

Net sales (decrease) %

Gross profit as % of net sales

2 unchanged sentences

Interest income

Income (loss) before income tax provision

Income (loss) before income tax as % of net sales

(Loss) income before income tax provision

(Loss) income before income tax as % of net sales

Income tax provision

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

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

2021 Results Compared with 2020

( 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.

For the three and nine months ended March 31, 2021, net sales decreased 16.7% and 1.7%, respectively.

The decrease in net sales was driven by decreased sales to mass retail customers in the US.

Improved sales to export distrbutors offset a portion of the US mass retail declines.

Net sales in the domestic market were approximately $2,693,000 in the three months ended March 31, 2021, compared to approximately $4,227,000 in the prior year period.

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.

Net sales to certain distrbutors were negatively impacted in the quarter ended March 31, 2021 due to timing of shipments and sales recognition that was delayed until the fiscal fourth quarter.

In March 2020, there was a surge in demand as pandemic related shutdowns took place causing many people to work and study remotely.

Current year comparisons to the three months ended March 31, 2020, show declines in several channels due to the strength in last year’s numbers.

The Company made the final shipment of a non Koss branded product to a mass retailer in the US during the quarter ended March 31, 2021.

The loss of net sales for this product will likely increase margins since it had very low margins compared to other products.

Domestic net sales were approximately $10,292,000 in the nine months ended March 31, 2021 compared to $11,870,000 in the prior year period.

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 nine months ended March 31, 2020 that did not take place in 2021.

The other declines were in the educational markets and sales to online retailers.

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, as there were large shipmen ts at the end of o ur fiscal quarter ended June 30 , 2020.

Sales in educational markets also decreased during the nine months ended March 31, 2021 compared to the prior year period due to many schools closing as a result of the pandemic.

Sales through online retailers declined as the Company shifts to more Amazon Seller Central.

These were partially offset by growth in the Company Direct to Consumer (“DTC”) online sales channels and certain US-based distributors.

Sales through DTC online channels increased by approximately 2.5 times compared to the prior year period.

Certain domestic distributors had higher sales due to COVID-19 related customer demand.

Export net sales more than doubled to approximately $1,294,000 for the three months ended March 31, 2021, compared to approximately $562,000 for the same period last year.

Net sales to export markets were approximately $3,834,000 in the nine months ended March 31, 2021 compared to $2,493,000 in the prior year period.

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

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.

Gross profit increased to 33.1% for the nine months ended March 31 , 2021, compared to 29.9 % for the nine months ended March 31, 20 20.

Sales in the current year reflect more favorable mix by markets and products.

The higher 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 s in the nine months ended March 31, 2020 that was recognized in the current year.

Selling, general and administrative expenses for the three months ended March 31, 2021, increased 34.6% or approximately $584,000 to approximately $2,272,000.

For the nine months ended March 31, 2021, selling, general and administrative expenses increased 9.2% or approximately $454,000 compared to the same period last year.

The primary factor was employer taxes on stock option exercises of approximately $544,000 in the three months ended March 31, 2021.

There was also increased deferred compensation expenses.

These costs were partially offset by lower legal expenses and a reduction in the 401k company match.

Income tax expense for the three and nine months ended March 31, 2021, 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.

The effective tax rate was less than 1% in the three and nine months ended March 31, 2021 and 2020.

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 federal net operating loss carryforwards that existed as of June 30, 2020, plus the additional federal net operating loss carryforward of approximately $7,400,000 generated by the deductible compensation expense on stock option exercises .

In the three months ended March 31, 2021, stock option exercises resulted in tax deductible compensatio n expense of approximately $29,3 00,000.

The deduction of this stock option exercise compensation expense will cause a tax loss in the year ended June 30, 2021, which will be carried forward to future tax years.

The expected tax loss carryforward will create a deferred tax asset of approximately $7,400,000.

The future realization of this deferred tax asset is uncertain.

The valuation allowance was increased to fully offset the deferred tax asset.

As previously reported, the Company has launched a program focused on enforcing its intellectual property and, in particular, certa in of its patent portfolio.

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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.

Additionally, 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 will be due to third parties.

The Company believes that its financial position remains strong.

The Company had $6.0 million of cash and cash equivalents and available cred it facilities of $5.0 million at March 31, 2021.

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.

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

The Company continued to see strong demand in the quarter ended March 31, 2021 f or specific communication h eadphones as people continued to work from home and studied online due to COVID-19 related directives.

However, certain retail businesses throughout the Company’s markets , particularly in certain European markets, have seen continued disruption.

This has resulted in a decline in business across our markets with the exception of online 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 ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on the Company’s business, financial position, results of operations or liquidity, 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 timely rollout of the vaccines, effectiveness of the vaccines, the duration of the pandemic, its geographic spread, further business disruptions and the overall impact on the global economy.

Many European countries continued to have lockdowns in the three months ended March 31, 2021, which negatively impacted sales into those countries.

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:

Until recently, these disruptions had little on-going impact.

In the past six months, the Company began experiencing issues related to the availability of containers and routing to move products in a time efficient manner.

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

The Company is monitoring the situation closely and the supply chain team has modified business plans, which include, but are not limited to:

(1) increasing the investment in inventory;

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Liquidity and Capital Resources

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

The following table summarizes cash flows from operating, investing and financing activities for the nine months ended March 31, 2021 and 2020:

Total cash provided by (used in):

2 unchanged sentences

Financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

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.

The investment in inventories was the driving factor for the de crease in cash provided by operating activities during the nine months ended March 31, 2021.

This inventory investment was made to ensure availability of communication headphones and to provide better inventory positions on key products to mitigate the im pacts of supply chain disruptions.

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.

Cash used in investing activities was higher for the nine months ended March 31, 2021, as the Company had increased expenditures for a new operating system, 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 $700,000.

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.

The Company expects to gener ate sufficient cash flow from operations or from 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.

In the nine months ended March 31, 2021, an aggregate of 1,111,992 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan and the 1990 Flexible Incentive Plan.

The cash provided from these stock option exercises was approximately $3 .1 million .

No stock options were exercised in 2020.

As of March 31, 2021, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stoc k in the quarters ended March 31, 2021 or 2020 under the stock repurchase p rogram.

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

Additionally, in the nine months ended March 31, 2021, the Company implemented and capitalized a new integrated cloud-based operating system .

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.

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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.

As of March 31, 2021, and June 30, 2020, there were no outstanding borrowings on the facility.

Contractual Obligation

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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.

At March 31, 2021, 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