What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-04 compared with 2021-10-29 · 65 added, 56 removed, 65 unchanged (65% of the section changed)

4 unchanged sentences

Financial Results

The following table presents selected financial data for the three months ended September 30, 2021 and 2020:

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

Three Months Ended

Six Months Ended

Financial Performance Summary

Net sales (decrease) %

Net sales (decrease) increase %

Gross profit as % of net sales

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Selling, general and administrative expenses as % of net sales

Interest income (expense)

(Loss) income before income tax provision

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

Interest income

Income before income tax provision

Income before income tax as % of net sales

Income tax provision

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

Quarter Ended September 30, 2021 Results Compared with September 30, 2020

For the three months ended September 30, 2021, net sales decreased 16.2%.

The approximately $843,000 decrease in net sales was driven by declines in the domestic markets that were partially offset by strength in European markets.

Net sales in the domestic market were approximately $2,788,000 in the three months ended September 30, 2021, compared to approximately $3,939,000 in the prior year period.

Net sales to certain distrbutors were negatively impacted in the quarter ended September 30, 2021 due to timing of shipments and inventory levels at those distributors causing them to decrease orders.

Product shipments have been negatively impacted due to delays in U.S.

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 was approximately $727,000 at lower than normal margins.

Export net sales increased to approximately $1,578,000 for the three months ended September 30, 2021, compared to approximately $1,269,000 for the same period last year.

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

A significant portion of the increase was related to new products, introduced in the last year, as well as increased sales of headphones used for working and studying remotely.

The sell through for certain of the new products has steadily increased since their introduction.

Gross profit increased to 36.2% for the three months ended September 30, 2021, compared to 31.4% for the three months ended September 30, 2020.

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

The higher gross profit in the current year was partially due to lost placement at a U.S.

based mass retailer, which was low margin business.

Income tax provision as % of 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 months and six ended December 31, 2021, net sales decreased 10.4% and 13.4%, respectively.

The decrease in net sales was driven primarily by declines in the domestic markets.

Net sales in the domestic market were approximately $3,192,000 in the three months ended December 31, 2021, compared to approximately $3,652,000 in the prior year period.

Domestic net sales for the six months ended December 31, 2021 were $6,004,000 compared to $7,599,000 for the same period in the prior year.

Net sales to certain distrbutors were down as a result of a prior year surge in demand for communication headsets in the education market that did not continue at the same level in the current fiscal period.

Also, the loss of sales to a mass retailer in the U.S.

for a non Koss branded product impacted sales by $165,000 and $892,000, respectively, for the three and six months ended December 31, 2021.

The final shipment of this product was during the quarter ended March 31, 2021.

These net sales were at lower than normal margins.

These declines were partially offset by growth in direct-to-consumer (DTC) sales.

Export net sales decreased slightly to approximately $1,224,000 for the three months ended December 31, 2021, compared to approximately $1,278,000 for the same period last year.

Export sales were approximately $2,777,000 in the six months ended December 31, 2021 compared to approximately $2,539,000 in the prior year period.

Sales to distributors in Europe were the primary drivers for the six month increase, mainly related to new products introduced in the last year.

Gross profit increased to 35.7% for the six months ended December 31, 2021, compared to 32.1% for the six months ended December 31, 2020.

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

The higher gross profit in the current year was due mainly to lost placement at a U.S.

based mass retailer, which was low margin business, and increased, higher margin sales to DTC and distributors in the prison market.

Late in the fiscal year ended June 30, 2021, the Company began experiencing increased delays in product shipments from suppliers in Asia.

The disruption at the ports on the U.S.

west coast, as well as congestion in domestic railyards, has caused delays and significantly increased inbound shipping costs.

The worldwide disruption in ocean freight, as well as congestion at the ports on the U.S.

west coast and domestic railyards, has caused delays and significantly increased inbound shipping costs.

The higher shipping costs will negatively impact margins in the forseeable future.

The Company is implementing various pans to mitigate the negative impacts of these higher costs.

Selling, general and administrative expenses for the three months ended September 30, 2021 increased 18.3% or approximately $275,000 to approximately $1,781,000.

The primary factor was employer taxes on stock option exercises of approximately $121,000 in the three months ended September 30, 2021.

There was also approximately $100,000 of expense related to a license agreement entered into in July 2021 as well as increased deferred compensation expenses.

Income tax expense for the three months ended September 30, 2021, was comprised of the U.S.

Selling, general and administrative expenses for the three months ended December 31, 2021 decreased 23.9%, or approximately $387,000 to approximately $1,229,000.

The primary factor was the reversal of the deferred compensation liability of $472,000 for the Company’s founder who passed away in December 2021.

This was partially offset by an increase in expenses related to information technology systems and services.

Other income for the three and six months ended December 31, 2021 was $256,000 and $356,000, respectively.

In December 2021, the Company recognized other income on the proceeds from a company-owned life insurance policy on its founder, who passed away December 21, 2021.

In July 2021, the Company recorded a one-time license fee of $100,000 related to a license agreement entered into with a headphone manufacturer whereby the manufacturer licensed the use of certain patents in certain of their headphones.

A related payment of $100,000 to a third party was charged to legal expense.

For the three and six months ended December 31, 2020, the Company recognized other income of $507,000 related to the forgiveness of an unsecured loan under the Small Business Administration Paycheck Protection Program of the CARES Act.

Income tax expense for the three and six months ended December 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 effective tax rate was less than 1% in the three months ended September 30, 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, 2021, plus the additional federal net operating loss carryforward generated by the deductible compensation expense on stock option exercises in the quarter ended September 30, 2021.

In the three months ended September 30, 2021, stock option exercises resulted in tax deductible compensation expense of approximately $7,800,000.

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

In the six months ended December 31, 2021, stock option exercises resulted in tax deductible compensation expense of approximately $8,000,000.

The deduction of this stock option exercise compensation expense will cause a tax loss in the year ended June 30, 2022, which will be carried forward to future tax years.

The expected federal tax loss carryforward, including the stock-based compensation expense deductions in the three months ended September 30, 2021, will be approximately $39,900,000.

The additional estimated tax loss carryforward increased the deferred tax asset to approximately $12,100,000 as of September 30, 2021, and the future realization of this is uncertain.

The expected federal tax loss carryforward, including the stock-based compensation expense deductions in the six months ended December 31, 2021, will be approximately $39,800,000.

The additional estimated tax loss carryforward increased the deferred tax asset to approximately $12,000,000 as of December 31, 2021, and the future realization of this is uncertain.

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

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

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

The Company has enforced its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless headphone technology.

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The Company believes that its financial position remains strong.

The Company had $7.2 million of cash and cash equivalents and available credit facilities of $5.0 million at September 30, 2021.

The Company had $7.8 million of cash and cash equivalents and available credit facilities of $5.0 million at December 31, 2021.

COVID-19 Impact

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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 September 30, 2021 for specific communication headphones 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.

Even though much of the population has returned to working from home and studying online due to recent COVID-19 related directives, the Company did not see the surge in the sale of specific communication headsets in the six months ended December 31, 2021 that occured in the same period in the prior year.

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

The Company expects the negative sales impacts caused by this disruption to continue until markets re-open and consumer spending returns to normal.

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 determined by the effectiveness of the vaccines, rollout of vaccine boosters, the duration of the pandemic, impact of variants, its geographic spread, further business disruptions and the overall impact on the economy throughout the globe.

The Company's future results will be determined by the effectiveness of vaccines, rollout of vaccine boosters, the duration of the pandemic, impact of variants, its geographic spread, further business disruptions and the overall impact on the economy throughout the globe.

The Company’s supply chain is primarily in southern China.

Over past twelve months, the Company has experienced issues related to the availability of containers and routing to move products in a cost effective and time efficient manner.

Beginning in fiscal year 2021, the Company has experienced issues related to the availability of containers and routing to move products in a cost effective and time efficient manner.

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

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Liquidity and Capital Resources

The following table summarizes cash flows from operating, investing and financing activities for the three months ended September 30, 2021 and 2020:

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

Total cash provided by (used in):

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Financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Operating Activities

The investment in inventories was the driving factor for the increase in cash used by operating activities during the three months ended September 30, 2021.

The Company has increased investment in inventory to ensure availability of communication headphones and to provide better inventory positions on key products to mitigate the impacts of supply chain disruptions.

The impact of the investment in inventory was partially offset by increased accounts payable related to the inventory investment.

The investment in inventories was the driving factor for the increase in cash used by operating activities during the six months ended December 31, 2021.

The Company has increased investment in inventory to ensure availability and to provide better inventory positions on key products to mitigate the impacts of supply chain disruptions.

The impact of the investment in inventory was partially offset by a decrease in accounts receivable, as a result of lower sales, and increased accounts payable related to the inventory investment.

The cash used by operating activities in the three and six months ended December 31, 2021 also included a net gain on a life insurance policy held on the Company’s founder, who passed away in December 2021.

Investing Activities

Cash used in investing activities was lower for the three months ended September 30, 2021.

Cash used in investing activities for the six months ended December 31, 2021 was lower than the same period in the prior year.

In the prior year, the Company had increased expenditures for a new operating system and leasehold improvements.

During the fiscal year ending June 30, 2022, 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 from operations or from the use of its available cash and its credit facility to fund these expenditures.

The Company expects to generate sufficient cash flow from operations or from the use of its available cash and its credit facility to fund any necessary tooling, leasehold improvement and capital expenditures.

Financing Activities

In the three months ended September 30, 2021, an aggregate of 529,089 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan.

In the six months ended December 31, 2021, an aggregate of 539,089 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan.

The cash provided from these stock option exercises was approximately $1.4 million.

No stock options were exercised in the three months ended September 30, 2020.

As of September 30, 2021, 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, 2021 or 2020 under the stock repurchase program.

An aggregate of 42,658 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan in the six months ended December 31, 2020.

The cash provided from these stock option exercises was approximately $89,000.

As of December 31, 2021, 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, 2021 or 2020 under the stock repurchase program.

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

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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, 2021, and June 30, 2021, there were no outstanding borrowings on the facility.

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

As of December 31, 2021, and June 30, 2021, 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.

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

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.

2 unchanged sentences

Off-Balance Sheet Transactions

At September 30, 2021, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

At December 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 2. Management’s Discussion and Analysis