What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-02-02 compared with 2023-10-27 · 72 added, 66 removed, 90 unchanged (61% of the section changed)

9 unchanged sentences

Financial Results

The following table presents selected financial data for the three months ended September 30, 2023 and 2022:

The following table presents selected financial data for the three and six months ended December 31, 2023 and 2022:

Three Months Ended

Six Months Ended

Financial Performance Summary

4 unchanged sentences

Interest income

(Loss) income before income tax provision

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

Income tax provision

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

(Loss) income before income tax provision (benefit)

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

Income tax provision (benefit)

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

Fiscal 2023 Period Results Compared with Fiscal 2022 Period

(comments refer to the three-month periods ended September 30 unless otherwise noted)

Net sales of $3,374,000 for the quarter ended September 30, 2023 were fairly consistent with sales for the same quarter in the prior year, an increase of $10,000.

A reduction in direct-to-consumer (DTC) sales and sales to certain of our distributors in the domestic market were offset by an increase in sales to the European markets.

Export net sales for the three months ended September 30, 2023 increased by $129,000, or 20.1%, compared to the three months ended September 30, 2022, related to an order from a distributor in Eastern Europe.

A $66,000, or 41.7%, reduction in sales to our Asian distributor slightly dampened the overall increase.

Given the perpetuation of the conflict in Eastern Europe and related export restrictions, sales to our Russian distributor have not resumed and there have been no sales to that country since April 2022.

During the three months ended September 30, 2023, net sales to the domestic market declined by $119,000, or 4.4%, offsetting much of the increase in export sales.

Net sales in the domestic market were approximately $2,603,000 compared to $2,722,000 in the three months ended September 30, 2022.

A notable sale to a new customer did not outweigh the 28.6% drop in DTC sales as a general reduction in consumer confidence slowed spending.

A 12.6% decline in net sales to certain of our domestic distributors, resulting from continued overstocked inventory levels of non-Koss items at these distributors, also contributed to the overall decline.

Gross profit margin decreased to 31.6% for the three months ended September 30, 2023, compared to 35.5% for the three months ended September 30, 2022.

A less favorable customer mix of sales, with a lower volume of higher margin DTC and distributor sales, coupled with the continued sell through of Company inventory received from suppliers with higher freight rates, adversely impacted the gross margin.

An increase in inventory obsolescence also drove the reduction in margins.

Favorability in fixed manufacturing expenses during the three months ended September 30, 2023 as a result of cost savings initiatives provided some positive impact compared to the same period in the prior year.

Freight rates edged up slightly through the quarter ended September 30, 2023 and are expected to continue a slow rise during the next quarter.

Given the current labor landscape and the recent settlement of threatened carrier strikes and labor disputes, along with rising energy prices, the Company is anticipating an increase in transportation costs.

The Company’s partnership with a dedicated freight forwarder will help to stabilize contract rates to limit the impact.

While the recent announcement by Yellow freight lines that it has declared bankruptcy may impact carrier availability and increase freight costs, the Company has had no material direct exposure to Yellow.

Selling, general and administrative expenses declined by $22,144,000, or 93.5%, from $23,680,000 for the three months ended September 30, 2022 to $1,536,000 for the same three months in the current period.

The decrease was predominantly driven by the $21,016,000 of legal fees and related expenses incurred during the first quarter in the prior year in support of the Company’s patent defense litigation.

Also, expenses related to bonus and profit-sharing accruals of $381,000 and $576,000, respectively, were recorded during the quarter ended September 30, 2022 as a result of the increased net income before income taxes due mainly to the licensing proceeds received during that quarter, offset by the aforementioned legal fees.

Lastly, the increase in the discount rates used to calculate the deferred compensation liability resulted in a decrease in the liability with a corresponding decrease to expense during the current quarter.

No other income was recorded for the three months ended September 30, 2023.

Other income for the same three months in the prior period consisted entirely of $33,000,000 in licensing proceeds received.

Given the taxable loss for the first quarter of fiscal year 2024, no federal income tax expense was recorded.

State income tax expense of approximately $1,900 was recorded reflecting the minimum required tax due.

For the three months ended September 30, 2022, the utilization of net operating loss carryforwards significantly reduced the taxable income generated by the net licensing proceeds and income tax expense of $598,000, consisting of federal and state tax provisions of $449,000 and $149,000, respectively, was recorded.

The effective tax rate was less than 1% in the three months ended September 30, 2023 and 5.7% in the three months ended September 30, 2022.

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

Net sales of $3,360,000 for the three months ended December 31, 2023 were 2.4% ahead of sales for the same three-month period in the prior year, an increase of $79,000.

An increase in sales of custom headphones and sales to internet retailers and domestic distributors was mostly offset by reductions in direct-to-consumer (“DTC”) sales and sales to certain of our European distributors.

For the six months ended December 31, 2023, sales of $6,734,000 were slightly favorable compared to $6,645,000 of sales for the first half of the prior fiscal year.

All export market sales and DTC sales were down compared to the prior year, offset by increased sales of custom headphones.

For the three months ended December 31, 2023 compared to the same period in the prior year, sales to export markets declined by $432,000, or 38.4%, to $693,000, due to lower-than-expected sales to two of our largest European distributors.

The six months ended December 31, 2023 saw a drop in sales to those same distributors, however, a rather sizable order from a distributor in Eastern Europe helped to somewhat offset that decline.

Sales to our Asian and Canadian distributors decreased by $140,000, or 42.7%, year over year, contributing to the overall decline in export markets.

There were no sales to our Russian distributor during the current fiscal year, nor have there been any since April 2022.

Net sales to the domestic market increased by $511,000, or 23.7%, more than offsetting the decrease in export sales.

Net sales for the three months ended December 31, 2023 were $2,667,000 versus $2,156,000 for the same three-month period in 2022.

For the six months ended December 31, 2023, domestic sales were $5,271,000, or 7.7%, higher than sales to those same markets during the same period in the prior year.

A notable sale to a new customer, sales of custom headphones for the education and OEM markets, along with an increase in sales to e-tailers, carried the domestic market for the three- and six-month periods in the current fiscal year.

The favorability more than offset the 25.9% and 27.1% drop in DTC sales, respectively.

For the three months ended December 31, 2023, gross margin as a percentage of net sales was 33.0%, a drop of 160 basis points compared to 34.6% for the three months ended December 31, 2022.

A more favorable customer mix of sales, due mainly to the higher margin custom sales and a reduced volume of lower margin export sales, coupled with favorability experienced in fixed manufacturing expenses as a result of cost savings initiatives, were more than offset by the margin hit as a result of a lower volume of higher margin DTC sales and the continued sell through of Company inventory brought in from suppliers at higher freight rates.

An increase in the excess and obsolete reserve also contributed negatively to the gross margin.

The gross margin as a percentage of sales for the six months ended December 31, 2023 was 32.3% compared with 35.1% for the same six months in the prior year.

The current period’s margins were adversely impacted by the aforementioned sell-through of inventory combined with an increase in the reserve for excess and obsolete inventory.

A reduction in fixed manufacturing expenses helped to partially offset the margin decline.

Freight rates remained fairly competitive through the six months ended December 31, 2023, but the Company is anticipating an increase in transportation costs in the coming quarter.

A combination of excess available capacity and lower demand due to declining consumer confidence could result in overcapacity in the market and rising prices.

The Company’s partnership with a dedicated freight forwarder continues to help stabilize contract rates to limit the impact.

Selling, general and administrative expenses were $1,585,000 for the three months ended December 31, 2023, a decrease of $898,000, or 36.2%, compared to the same three months in the prior year.

The decrease was primarily driven by legal fees and expenses incurred during the three months ended December 31, 2022 related to patent defense litigation resolved in that fiscal year.

Slightly offsetting the lower legal expense in the current year was an increase in deferred compensation expense driven by a decrease in the discount rates used to calculate the deferred compensation liability.

For the six months ended December 31, 2023, selling, general and administrative expenses of $3,121,000 were a significant drop from the $26,158,000 of expenses incurred for the six months ended December 31, 2022.

The decrease was predominantly driven by the $22,141,000 of legal fees and related expenses incurred during the prior six-month period in support of the Company’s patent defense litigation.

Also, expenses related to bonus and profit-sharing accruals of $359,000 and $576,000, respectively, were recorded during the six months ended December 31, 2022 as a result of the increased net income before income taxes due to the licensing proceeds received in that year.

The increase in the deferred compensation liability as of December 31, 2023 resulted in a corresponding increase to expense during the first six months of the current year and offset some of the decrease in legal expenses.

No other income was recorded for the three and six months ended December 31, 2023.

Other income for the six months in the prior period consisted entirely of $33,000,000 in licensing proceeds received during the first quarter.

As a result of a taxable loss for the first three and six months of fiscal year 2024, no federal income tax expense was recorded.

State income tax expense of $1,879 and $3,758 was recorded for the three and six months ended December 31, 2023, respectively, reflecting the minimum required tax due.

The condensed consolidated statement of operations for the three months ended December 31, 2022 reflected a federal tax benefit resulting from the taxable loss for the quarter.

For the six months ended December 31, 2022, the utilization of net operating loss carryforwards significantly reduced the taxable income for that period, resulting in federal and state tax provisions of $374,714 and $120,125, respectively.

The effective tax rate was less than 1% in the three and six months ended

December 31, 2023 and was 8.3% and 5.3%, respectively, in the three months and six months ended December 31, 2022.

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, 2023.

The Company’s remaining expected federal tax loss carryforward is expected to approximate $32,000,000 by the end of the fiscal year.

The taxable loss for the quarter increased the net operating loss carryforward deferred tax asset to approximately $8,300,000 as of September 30, 2023, and the future realization of this continues to be uncertain.

The valuation allowance was also increased to fully offset the net deferred tax asset as there is sufficient negative evidence to support the maintaining of a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative tax loss occurred.

The taxable loss for the first two quarters for fiscal year 2024 increased the net operating loss carryforward deferred tax asset to approximately $8,300,000 as of December 31, 2023, and the future realization of this continues to be uncertain.

The valuation allowance was reduced slightly to fully offset the net deferred tax asset as there is sufficient negative evidence to support the maintaining of a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative tax loss occurred.

As previously mentioned, 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.

If efforts are successful, the Company may

receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position from time to time.

If efforts are successful, the Company may receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position from time to time.

However, there is no guarantee of a positive outcome from these efforts in the future, which could ultimately be time-consuming and unsuccessful.

1 unchanged sentence

The Company believes that its financial position remains strong.

The Company had $2.0 million of cash and cash equivalents, $17.2 million of short-term investments and available credit facilities of $5.0 million on September 30, 2023.

The Company had $2.5 million of cash and cash equivalents, $12.1 million of short-term investments and available credit facilities of $5.0 million on December 31, 2023.

Recent Events

Recent and ongoing macroeconomic and geopolitical conditions have impacted, and will continue to impact, our business.

These include, the inflationary cost environment, reduced consumer confidence, disruption in our supply chain and trade tensions with China, the ongoing crisis in Eastern Europe, the crises in the Mideast, the possibility of a government shutdown in the U.S.

and increased risk of cyberattacks.

These include, the inflationary cost environment, reduced consumer confidence, disruption in our supply chain and trade tensions with China, the ongoing crises in Eastern Europe and the Mideast, and increased risk of cyberattacks.

While the impact of these factors on our fiscal 2024 performance remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, or results of operations.

2 unchanged sentences

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

Inflation may impact customer demand for our products resulting from a slowdown in consumer spending as disposable income decreases due to rising interest rates, the price of essential items and dwindling savings.

Other risk factors further exacerbated by inflation include supply chain disruptions, rising oil and energy costs, risks of international operations and the recruitment and retention of talent.

Supply Chain Disruption and Trade Tensions with China - The Company relies on our third-party supply chain and distribution networks and the availability of necessary components to produce a significant number of our products.

Inflation may impact customer demand for our products resulting from a slowdown in consumers’ willingness to spend as disposable income decreases due to rising prices of essential items, dwindling savings and the resumption of student loan repayments.

Other risk factors further exacerbated by inflation include supply chain disruptions, increased oil and energy costs, risks of international operations and the recruitment and retention of talent.

A reduction or interruption in supply, including interruptions due to a reoccurrence of the COVID-19 pandemic, geopolitical unrest, labor shortages or strikes, or a failure to procure adequate components, may lead to delays in manufacturing or increases in costs.

11 unchanged sentences

government abated a threatened railroad strike and implemented a labor agreement that prohibited the workers from striking, there has been movement by some of the leading railroad companies to grant paid sick leave with continued negotiations between union leaders and railroad executives of each of the remaining railroads.

In addition, Yellow freight lines recently announced their insolvency, however, the Company had no material direct exposure to Yellow in the current fiscal year.

In addition, Yellow freight lines announced their insolvency last quarter, however, the Company had no material direct exposure to Yellow in the current fiscal year.

The Company continues to monitor these situations as the changes in the current labor landscape, the settlement of recent labor disputes, coupled with rising energy prices, could potentially exacerbate disruptions in the supply chain, delay product shipments and increase transportation costs.

Russia’s Invasion of Ukraine - Financial and credit markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022.

In response to the invasion, the United States, United Kingdom, and European Union, along with others,

imposed significant sanctions and export controls against Russia, Russian banks and certain Russian individuals and may implement additional sanctions or take further punitive actions in the future.

In response to the invasion, the United States, United Kingdom, and European Union, along with others, imposed significant sanctions and export controls against Russia, Russian banks and certain Russian individuals and may implement additional sanctions or take further punitive actions in the future.

In accordance with Executive Order 14071 signed on April 6, 2022, the Company suspended sales to Russia.

Also, as a result of the humanitarian crisis in Ukraine created by the war and the population seeking refuge in other countries, sales to Ukraine have been impacted.

During the three months ended September 30, 2023 and 2022, there were no sales to Russia.

During the three and six months ended December 31, 2023 and 2022, there were no sales to Russia.

Cyberattacks - Cyberattacks are a growing geopolitical risk, becoming larger, more frequent, more intricate and more relentless.

7 unchanged sentences

Liquidity and Capital Resources

The following table summarizes cash flows from operating, investing and financing activities for the three months ended September 30, 2023 and 2022:

The following table summarizes cash flows from operating, investing and financing activities for the six months ended December 31, 2023 and 2022:

Total cash (used in) provided by:

2 unchanged sentences

Financing activities

Net (decrease) increase in cash and cash equivalents

Net (decrease) in cash and cash equivalents

Operating Activities

The cash used in operating activities during the three-month period ending September 30, 2023, was primarily payment of bonuses earned in the prior year, renewal of the annual general insurance policies and state income tax payments.

The Company’s strict management of its inventory investment helped to retain cash in the first quarter.

During the three months ended September 30, 2022, the majority of the cash provided by operating activities resulted from the licensing proceeds received, partially offset by the payment of related legal fees and expenses.

The reduction in the Company’s investment in inventory also contributed to the cash provided by operating activities during that period.

The cash used in operating activities during the six months ending December 31, 2023, was primarily the payment of bonuses earned in the prior year.

During the six months ended December 31, 2022, the majority of the cash provided by operating activities resulted from the licensing proceeds received, partially offset by the payment of related legal fees and expenses and profit sharing.

Investing Activities

Cash used by investing activities for the three months ended September 30, 2023 was related to fixed asset expenditures, predominantly the replacement of a roof section of the building for approximately $300,000.

The Company also paid the premiums on the company-owned life insurance policies on two of its executives.

This is consistent with the investing activities for the three months ended September 30, 2022.

During the first quarter of the current fiscal year, proceeds of $2,000,000 from the maturity of U.S.

Treasury securities were received and were fully utilized to purchase another similar security.

Cash used by investing activities for the six months ended December 31, 2023 was related to fixed asset expenditures, predominantly the replacement of a roof section of the building for approximately $300,000, and the payment of the premiums on the company-owned life insurance policies on two of its executives.

Also, during the first two quarters of the current fiscal year, proceeds of $7,223,000 from the maturity of U.S.

Treasury securities were received and utilized to purchase $7,177,000 of similar securities at a $180,000 discount.

Cash used by investing activities for the six months ended December 31, 2022 was almost entirely related to the

purchase of $15,312,000 of U.S.

Treasury securities at a discount of $427,000.

The Company believes that its available cash and its credit facility is sufficient to fund any necessary tooling, leasehold improvement and capital expenditures.

Financing Activities

As there were no stock option exercises during the first quarter of the current fiscal year, there was no impact on cash due to financing activities.

In the same quarter in the prior year, cash provided by financing activities was due entirely to stock option exercises.

An aggregate of 32,000 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan and the cash provided from these stock option exercises was approximately $70,000.

As of September 30, 2023, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the three months ended September 30, 2023 or September 30, 2022 under the stock repurchase program.

Cash from the exercise of stock options during the six months ended December 31, 2023 and 2022 provided the cash from financing activities.

An aggregate of 20,000 and 42,000 shares of common stock, respectively, were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan for those periods.

As of December 31, 2023, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the three and six months ended December 31, 2023 or December 31, 2022 under the stock repurchase program.

The Company believes its existing cash and cash equivalents, investments in short-term U.S.

12 unchanged sentences

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

As of September 30, 2023, the Company was in compliance with all covenants related to the Credit Agreement.

As of September 30, 2023 and June 30, 2023, there were no outstanding borrowings on the facility.

As of December 31, 2023, the Company was in compliance with all covenants related to the Credit Agreement.

As of December 31, 2023 and June 30, 2023, there were no outstanding borrowings on the facility.

Contractual Obligation

7 unchanged sentences

Off-Balance Sheet Transactions

At September 30, 2023, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

At December 31, 2023, 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