What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2022-02-04 · 85 added, 65 removed, 65 unchanged (70% of the section changed)

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Financial Results

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

The following table presents selected financial data for the three and nine months ended March 31, 2022, and 2021:

Three Months Ended

Six Months Ended

Nine Months Ended

Financial Performance Summary

Net sales (decrease) increase %

Net sales increase (decrease) %

Gross profit as % of net sales

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Interest income

Income before income tax provision

Income before income tax as % of net sales

Income (loss) before income tax provision

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

Income tax provision

Income tax provision as % of income before income tax

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

2022 Results Compared with 2021

(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.

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

Net sales for the quarter ended March 31, 2022 increased 16.2% behind better than expected direct-to-consumer (DTC) sales and sales to our distributor market class.

For the nine months ended March 31, 2022, net sales declined by 5% driven primarily by declines in sales to certain of our distributors and minimal sales to mass retailers.

Net sales in the domestic market were approximately $3,735,000 in the three months ended March 31, 2022, compared to approximately $2,693,000 in the prior year period.

Domestic net sales for the nine months ended March 31, 2022 were $9,781,000 compared to $10,292,000 for the same period in the prior year, a decrease of 5%.

Net sales to our largest distributor 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.

for a non-Koss branded product impacted sales by $188,000 and $1,080,000 for the three and nine months ended March 31, 2022, respectively.

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 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.

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.

These net sales were at lower than average margins.

These declines were mostly offset by growth in DTC sales.

Export net sales decreased to approximately $899,000 for the three months ended March 31, 2022, compared to approximately $1,294,000 for the same period last year due to an overall reduction in sales to Europe distributors.

Export net sales for the nine months ended March 31, 2022 also declined, to approximately $3,634,000 in the current fiscal year as compared to approximately $3,834,000 in the prior year period.

The continuing decline in sales to distributors in Asia was the primary driver for the nine month decrease.

Gross profit increased to 38.0% for the nine months ended March 31, 2022, compared to 33.1% for the nine months ended March 31, 2021.

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

Increased, higher margin sales to DTC and the distributors class translated to higher gross profit margins.

Lost placement at a U.S.

based mass retailer, which was low margin business, contributed as well.

The delays throughout the supply chain that began late last fiscal year as a result of the persistence of COVID-19 in all parts of the world, and presently due in part to the recent conflict in Eastern Europe, continue to affect the Company.

Chinese New Year added to the delays in product shipments from suppliers in Asia.

The ongoing disruption in ocean freight and congestion at the ports on the U.S.

west coast resulting in delivery delays have resulted in increased inbound shipping costs.

While rising shipping costs are expected to linger and negatively impact margins in the foreseeable future, the Company did see lower freight rates on inbound shipments during the quarter ended March 31, 2022, due in part to a dedicated freight forwarding partner.

Selling, general and administrative expenses for the three months ended March 31, 2022 decreased 31.0%, or approximately $705,000, to approximately $1,566,000.

The decrease was primarily driven by a drop in employer taxes on stock option exercises which were approximately $536,000 during the prior year’s third quarter and zero in the current quarter.

For the nine months ended March 31, 2022, selling, general and administrative expenses dropped $817,000, or 15.1%, compared to the same period in the prior year.

The primary factors were the reversal of the deferred compensation liability of $473,000 for the Company’s founder who passed away in December 2021 and lower employer taxes on fewer stock option exercises during the nine months ended March 31, 2022.

Other income for the three and nine months ended March 31, 2022 was $6,000 and $362,000, respectively, compared to $379,000 and $886,000 during the same three and nine month periods in the prior year.

In fiscal year 2022, the Company recognized $262,000 of other income related to the proceeds from a company-owned life insurance policy on its founder, who passed away in December 2021.

Also, 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 and six months ended December 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, 2021, plus the additional federal net operating loss carryforward generated by the deductible compensation expense on stock option exercises for the six months ended December 31, 2021.

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

For the nine months ended March 31, 2021, other income includes $507,000 related to the forgiveness of the Company’s unsecured loan under the Small Business Administration Paycheck Protection Program of the CARES Act as well as $379,000 received from a director in disgorgement of short-swing profits under Section 16(b) of the Exchange Act.

Income tax expense for the three and nine months ended March 31, 2022 was comprised of the U.S.

federal statutory rate of 21% and the blended state income tax rate of approximately 3.5%, offset by an adjustment to the valuation allowance for deferred tax assets.

The effective tax rate was less than 1% in the three and nine months ended March 31, 2022 and 2021.

In the nine months ended March 31, 2022, 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 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.

The expected federal tax loss carryforward, including the stock-based compensation expense deductions in the nine months ended March 31, 2022, will be approximately $39,000,000.

The quarterly adjustment to the estimated tax loss carryforward decreased the deferred tax asset to approximately $11,800,000 as of March 31, 2022, and the future realization of this is uncertain.

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

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

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The Company believes that its financial position remains strong.

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

The Company has been closely monitoring the COVID-19 situation to protect the health and safety of its employees and customers.

The Company had $9.5 million of cash and cash equivalents and available credit facilities of $5.0 million on March 31, 2022.

Recent Events

Recent events continuing to impact our business include COVID-19, the inflationary cost environment, disruption in our supply chain, and Russia’s invasion of Ukraine.

As more fully described below, we expect each of these factors will impact our fiscal 2022 performance.

While the impact of these factors remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, or results of operations.

These and other uncertainties with respect to these recent events could result in changes to our current expectations.

The Company has closely monitored the impact of COVID-19 (including the emergence of variants) to protect the health and safety of its employees and customers.

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

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.

While we expect the impacts of COVID-19 on our business to moderate, there still remains uncertainty around the pandemic.

As a result of the COVID-19 pandemic, uncertainty with respect to its economic effects has impacted not only our operating results but also the global economy.

The extent and nature of government actions to ease restrictions are varied based upon the current extent and severity of the COVID-19 pandemic within their respective countries and localities.

The Company saw a surge in the sale of specific communication headsets in the nine months ended March 31, 2021 that did not repeat in the same period in the current year.

Also, certain retail businesses throughout the Company’s markets, particularly in certain European markets due to the spread of the Omicron subvariant BA.2, have seen continued disruption.

The Company expects the negative sales impacts caused by this disruption to continue until markets more fully 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 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.

To protect the safety, health and well-being of employees, customers, and suppliers, the Company continues to maintain 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.

Inflationary Cost Environment and Supply Chain Disruption – During fiscal 2022, we have experienced inflationary cost increases in our commodities, packaging materials and transportation costs.

These increases have been partially mitigated by pricing actions implemented in the third quarter of the current fiscal year, as well as working with a dedicated freight forwarding partner to minimize freight rate increases.

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

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.

Since late fiscal year 2021, the Company has experienced issues related to the availability of containers and routings 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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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.

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.

The latest COVID-19 resurgence resulted in another shut-down of several major ports in China, thus impacting manufacturing of our products and shipments from our suppliers.

Russia’s Invasion of Ukraine:

The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty.

In accordance with the recent Executive Order declared on April 6, 2022, the Company has suspended sales into Russia.

Also, given the current humanitarian crisis in Ukraine and the population seeking refuge in other countries, sales to Ukraine have been impacted.

Neither Russia nor Ukraine constitutes a significant portion of the business, less than 5% of net sales for the three months ended March 31, 2022, so there was not a material impact on the current quarter.

We are uncertain, however, of the impact it will have on our results of operations for the future.

Liquidity and Capital Resources

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

The following table summarizes cash flows from operating, investing and financing activities for the nine months ended March 31, 2022 and 2021:

Total cash provided by (used in):

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Operating Activities

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.

The investment in inventories was the driving factor for the increase in cash used by operating activities during the nine months ended March 31, 2022.

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

The impact of the investment in inventory was partially offset by increased accounts payable and accrued liabilities related to the inventory investment and an increase in customer deposits from certain of our export customers.

The cash used by operating activities in the nine months ended March 31, 2022 also included a net gain of $262,000 on a life insurance policy held on the Company’s founder, who passed away in December 2021.

Investing Activities

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

Cash provided by investing activities for the nine months ended March 31, 2022 was related to the receipt of $2,014,000 of proceeds on company-owned life insurance policies on the Company’s founder who passed away in December 2021.

This was slightly offset by premiums paid for company-owned life insurance policies on other executives.

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

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Financing Activities

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.

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.

In the nine months ended March 31, 2022, 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 $1,390,000.

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.

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 in the nine months ended March 31, 2021.

The cash provided from these stock option exercises was approximately $3,115,000.

As of March 31, 2022, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the quarters ended March 31, 2022 or 2021 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 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.

As of March 31, 2022, the Company was in material compliance with all covenants related to the Credit Agreement.

As of March 31, 2022, and June 30, 2021, there were no outstanding borrowings on the facility.

Contractual Obligation

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Off-Balance Sheet Transactions

At December 31, 2021, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

At March 31, 2022, 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

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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