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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
for the quarterly period ended
OR
Commission File Number
(Exact Name of Registrant as Specified in its Charter)
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(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
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(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
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| Smaller reporting company | |
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes ☐ No
At January 31, 2022, there were
KOSS CORPORATION
FORM 10-Q
December 31, 2021
INDEX
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
KOSS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
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| December 31, 2021 |
| June 30, 2021 | ||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | |
| $ | |
Accounts receivable, less allowance for doubtful accounts of $ |
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Life insurance receivable |
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| — |
Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Equipment and leasehold improvements, net |
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Other assets: |
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Operating lease right-of-use asset |
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Cash surrender value of life insurance |
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Total other assets |
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Total assets | $ | |
| $ | |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable | $ | |
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Accrued liabilities |
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Deferred revenue |
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Operating lease liability |
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Income taxes payable |
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Total current liabilities |
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Long-term liabilities: |
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Deferred compensation |
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Deferred revenue |
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Operating lease liability |
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Total long-term liabilities |
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Total liabilities |
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Stockholders equity: |
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Common stock, $ |
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Paid in capital |
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Retained earnings |
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Total stockholders equity |
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Total liabilities and stockholders equity | $ | |
| $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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| Three Months Ended |
| Six Months Ended | ||||||||
| December 31 |
| December 31 | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net sales | $ | |
| $ | |
| $ | |
| $ | |
Cost of goods sold |
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Gross profit |
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Selling, general and administrative expenses |
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Income from operations |
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Other income |
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Interest income |
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Income before income tax provision |
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Income tax provision |
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Net income | $ | |
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| $ | |
| $ | |
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Income per common share: |
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Basic | $ | |
| $ | |
| $ | |
| $ | |
Diluted | $ | |
| $ | |
| $ | |
| $ | |
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Weighted-average number of shares: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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| Six Months Ended | ||||
| December 31 | ||||
| 2021 |
| 2020 | ||
Operating activities: |
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Net income | $ | |
| $ | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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(Recovery of) provision for doubtful accounts of accounts receivable |
| ( |
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Depreciation of equipment and leasehold improvements |
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Stock-based compensation expense |
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Change in cash surrender value of life insurance |
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Provision for deferred compensation |
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Deferred compensation paid |
| ( |
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Deferred compensation relieved |
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Other income - SBA loan forgiveness |
| — |
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Other income - Net gain from life insurance benefits |
| ( |
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| — |
Net changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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Prepaid expenses and other current assets |
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Income taxes receivable |
| — |
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Income taxes payable |
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| — |
Accounts payable |
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Accrued liabilities |
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Deferred revenue |
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Net cash (used in) provided by operating activities |
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Investing activities: |
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Purchase of equipment and leasehold improvements |
| ( |
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Life insurance premiums paid |
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Net cash (used in) investing activities |
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Financing activities: |
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Proceeds from exercise of stock options |
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Net cash provided by financing activities |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | |
| $ | |
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Non-cash financing and investing activity: |
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Reclassification of cash surrender value of life insurance to life insurance receivable | $ | |
| $ | — |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
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| Six Months Ended December 31, 2021 | ||||||||||||
| Common Stock |
| Paid in |
| Retained |
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| Shares |
| Amount |
| Capital |
| Earnings |
| Total | ||||
Balance, June 30, 2021 | |
| $ | |
| $ | |
| $ | |
| $ | |
Net income | — |
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Stock-based compensation expense | — |
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| — |
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Stock option exercises | |
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| — |
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Balance, December 31, 2021 | |
| $ | |
| $ | |
| $ | |
| $ | |
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| Six Months Ended December 31, 2020 | ||||||||||||
| Common Stock |
| Paid in |
| Retained |
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| Shares |
| Amount |
| Capital |
| Earnings |
| Total | ||||
Balance, June 30, 2020 | |
| $ | |
| $ | |
| $ | |
| $ | |
Net income | — |
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Stock-based compensation expense | — |
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Stock option exercises | |
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Balance, December 31, 2020 | |
| $ | |
| $ | |
| $ | |
| $ | |
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| Three Months Ended December 31, 2021 | ||||||||||||
| Common Stock |
| Paid in |
| Retained |
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| Shares |
| Amount |
| Capital |
| Earnings |
| Total | ||||
Balance, September 30, 2021 | |
| $ | |
| $ | |
| $ | |
| $ | |
Net income | — |
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Stock-based compensation expense | — |
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| — |
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Stock option exercises | |
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| — |
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Balance, December 31, 2021 | |
| $ | |
| $ | |
| $ | |
| $ | |
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| Three Months Ended December 31, 2020 | ||||||||||||
| Common Stock |
| Paid in |
| Retained |
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| Shares |
| Amount |
| Capital |
| Earnings |
| Total | ||||
Balance, September 30, 2020 | |
| $ | |
| $ | |
| $ | |
| $ | |
Net income | — |
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Stock-based compensation expense | — |
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Stock option exercises | |
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Balance, December 31, 2020 | |
| $ | |
| $ | |
| $ | |
| $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Unaudited)
The condensed consolidated balance sheets as of December 31, 2021 and June 30, 2021, the condensed consolidated statements of income for the three and six months ended December 31, 2021 and 2020, the condensed consolidated statements of cash flows for the six months ended December 31, 2021 and 2020, and the condensed consolidated statements of stockholders equity for the three and six months ended December 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. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The operating results for any interim period are not necessarily indicative of the operating results that may be experienced for the full fiscal year.
Certain information and footnote disclosure normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
A state tax provision of $
In December 2021, the Company recognized approximately $
The Company’s deferred compensation liabilities are for a current and former officer and are calculated based on various assumptions which may include compensation, years of service, expected retirement date, discount rates, and mortality tables. The related expense is calculated using the net present value of the expected payments and is included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations. The Company’s current and non-current compensation obligations are included in accrued liabilities and deferred compensation, respectively, in the Condensed Consolidated Balance Sheets.
The components of inventories were as follows:
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| December 31, 2021 |
| June 30, 2021 | ||
Raw materials | $ | |
| $ | |
Finished goods |
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Inventories, gross |
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Reserve for obsolete inventory |
| ( |
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| ( |
Inventories, net | $ | |
| $ | |
On May 14, 2019, the Company entered into a secured credit facility (Credit Agreement) with Town Bank (“Lender”). The Credit Agreement provides for a $
On April 13, 2020, the Company received an unsecured loan (the SBA Loan) for $
The Company disaggregates its net sales by geographical location as it believes it best depicts how the nature, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table summarizes net sales by geographical location:
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| Three Months Ended |
| Six Months Ended | ||||||||
| December 31, |
| December 31, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
United States | $ | |
| $ | |
| $ | |
| $ | |
Export |
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Net Sales | $ | |
| $ | |
| $ | |
| $ | |
Deferred revenue relates primarily to consumer and customer warranties. These constitute future performance obligations and the Company defers revenue related to these future performance obligations. In the six months ended December 31, 2021 and 2020, the Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $
Basic income per share is computed based on the weighted-average number of common shares outstanding. Diluted 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 income per share:
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| Three Months Ended December 31, |
| Six Months Ended December 31, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Numerator |
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Net income | $ | |
| $ | |
| $ | |
| $ | |
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Denominator |
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Weighted average shares, basic |
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Dilutive effect of stock compensation awards (1) |
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Diluted shares |
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Net income attributable to common shareholders per share: |
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Basic | $ | |
| $ | |
| $ | |
| $ | |
Diluted | $ | |
| $ | |
| $ | |
| $ | |
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
As of December 31, 2021, the Company is involved in the matters described below:
• In July 2020, the Company filed complaints in United States District Court against each of Apple Inc., Bose Corporation, PEAG, LLC d/b/a JLab Audio, Plantronics, Inc. and Polycom, Inc., and Skullcandy, Inc. The complaints allege infringement on the Company’s patents relating to its wireless audio technology. In the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts will be due to third parties. The Company does not expect to incur additional fees and costs related to these lawsuits that will have a material impact to its financial statements. Depending on the response to and the underlying results of the enforcement program, the Company may continue to litigate its claims, enter into licensing arrangements or reach some other outcome potentially advantageous to its competitive position.
• Early in fiscal year 2020, the Company was notified by One E-Way, Inc. that some of the Companys wireless products may infringe on certain One E-Way patents.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and possible litigation and assumptions relating to the foregoing. In addition, when used in this Form 10-Q, the words “aims,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “thinks,” “may,” “will,” “shall,” “should,” “could,” “would,” “forecasts,” “predicts,” “potential,” “continue” and variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this Form 10-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, but are not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, the receptivity of consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition, pricing, the number and nature of customers and their product orders, production by third party vendors, foreign manufacturing, sourcing, and sales (including foreign government regulation, trade and importation concerns), the effects of the COVID-19 pandemic on the economy and the Company’s operations, borrowing costs, changes in tax rates, pending or threatened litigation and investigations, and other risk factors described in the Risk Factors and in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021 and subsequently filed Quarterly Reports on Form 10-Q
Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect new information.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company developed stereo headphones in 1958 and has been recognized as a leader in the industry ever since. Koss markets a complete line of high-fidelity headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling headphones. The Company operates as one business segment, as its principal business line is the design, manufacture and sale of stereo headphones and related accessories.
Financial Results
The following table presents selected financial data for the three and six months ended December 31, 2021 and 2020:
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| Three Months Ended |
| Six Months Ended | ||||||||
| December 31 |
| December 31 | ||||||||
Financial Performance Summary | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net sales | $ | 4,415,886 |
| $ | 4,929,789 |
| $ | 8,780,953 |
| $ | 10,138,084 |
Net sales (decrease) increase % |
| (10.4)% |
|
| 18.4% |
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| (13.4)% |
|
| 5.9% |
Gross profit | $ | 1,549,693 |
| $ | 1,617,897 |
| $ | 3,131,530 |
| $ | 3,254,124 |
Gross profit as % of net sales |
| 35.1% |
|
| 32.8% |
|
| 35.7% |
|
| 32.1% |
Selling, general and administrative expenses | $ | 1,229,294 |
| $ | 1,615,824 |
| $ | 3,010,091 |
| $ | 3,121,595 |
Selling, general and administrative expenses as % of net sales |
| 27.8% |
|
| 32.8% |
|
| 34.3% |
|
| 30.8% |
Interest income | $ | 3,626 |
| $ | 2,660 |
| $ | 4,258 |
| $ | 609 |
Other income | $ | 255,975 |
| $ | 506,700 |
| $ | 355,975 |
| $ | 506,700 |
Income before income tax provision | $ | 580,000 |
| $ | 511,433 |
| $ | 481,672 |
| $ | 639,838 |
Income before income tax as % of net sales |
| 13.1% |
|
| 10.4% |
|
| 5.5% |
|
| 6.3% |
Income tax provision | $ | 1,031 |
| $ | 2,543 |
| $ | 2,062 |
| $ | 4,019 |
Income tax provision as % of income before income tax |
| 0.2% |
|
| 0.5% |
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| 0.4% |
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| 0.6% |
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 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. 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. 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.
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. If the program is successful, the Company may receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position; however, there is no guarantee of a positive outcome from these efforts, which could ultimately be time consuming and unsuccessful. Additionally, in the 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 $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. 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.
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 Companys 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. 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. 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; (2) being alert to potential short supply situations; (3) assisting suppliers with acquisition of critical components; and (4) utilizing alternative sources and/or air freight.
To protect the safety, health and well-being of employees, customers, and suppliers, the Company continues to implement several preventive measures while also meeting the needs of global customers. They include increased frequency of cleaning and disinfecting of facilities, social distancing practices, remote working when possible, restrictions on business travel, holding certain events virtually and limitations on visitor access to facilities.
The Company is committed to continuing to execute these plans and will remain in close contact with its supply chain to monitor future possible implications, especially on production facilities.
Liquidity and Capital Resources
Cash Flows
The following table summarizes cash flows from operating, investing and financing activities for the six months ended December 31, 2021 and 2020:
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Total cash provided by (used in): | 2021 |
| 2020 | ||
Operating activities | $ | (380,714) |
| $ | 784,680 |
Investing activities |
| (171,043) |
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| (478,288) |
Financing activities |
| 1,390,346 |
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| 88,918 |
Net increase in cash and cash equivalents | $ | 838,589 |
| $ | 395,310 |
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.
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. In the prior year, the Company had increased expenditures for a new operating system and leasehold improvements. 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 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. 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.
Liquidity
The Companys capital expenditures are primarily for leasehold improvements and tooling. In addition, it has interest payments on its borrowings when it uses its line of credit facility. The Company believes that cash generated from operations, together with cash reserves and available borrowings, provide it with adequate liquidity to meet operating requirements, debt service requirements and planned capital expenditures for the next twelve months following the date of this Quarterly Report on Form 10-Q and thereafter for the foreseeable future. The Company regularly evaluates new product offerings, inventory levels and capital expenditures to ensure that it is effectively allocating resources in line with current market conditions.
Credit Facility
On May 14, 2019, the Company entered into a secured credit facility (Credit Agreement) with Town Bank (“Lender”). The Credit Agreement provides for a $5,000,000 revolving secured credit facility with an interest rate of 1.50% over LIBOR. The Credit Agreement also provides for letters of credit for the benefit of the Company of up to a sublimit of $1,000,000. There are no unused line fees in the credit facility. On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50%. The Company and the Lender also entered into a General Business Security Agreement dated May 14, 2019 under which the Company granted the Lender a security interest in substantially all of the Company’s assets in connection with the Company’s obligations under the Credit Agreement. The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type. The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions. The Company is currently in 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 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. The lease extension maintained the rent at a fixed rate of $380,000 per year and included an option to renew at the same rate for an additional five years ending June 30, 2028. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership.
Off-Balance Sheet Transactions
At December 31, 2021, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that: (1) information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (2) such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2021. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as of December 31, 2021 were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
From time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During the period covered by this report, there were no material changes to the description of legal proceedings set forth in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed below and under Part 1. Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, as filed with the Securities and Exchange Commission on August 20, 2021. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this report. There have been no material changes to the risk factors described under “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to purchases of common stock of the Company made during the three months ended December 31, 2021, by the Company.
COMPANY REPURCHASES OF EQUITY SECURITIES
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| Total # of |
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| Approximate Dollar Value of | ||
October 1 - December 31, 2021 |
| — |
| $ | — |
| — |
| $ | 2,139,753 |
(1)In April of 1995, the Board of Directors approved a stock repurchase program authorizing the Company to purchase from time to time up to $2,000,000 of its common stock for its own account. Subsequently, the Board of Directors periodically has approved increases in the stock repurchase program. The most recent increase was for an additional $2,000,000 in October 2006, for a maximum of $45,500,000 of which $43,360,247 had been expended through December 31, 2021.
Item 6. Exhibits
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Exhibit No. | Exhibit Description |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer * |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer * |
32.1 | |
32.2 | |
101 | The following financial information from Koss Corporations Quarterly Report on Form 10-Q for the quarter ended December 31, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of December 31, 2021 and June 30, 2021, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended December 31, 2021 and 2020 (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended December 31, 2021 and 2020, (iv) Condensed Consolidated Statements of Stockholders Equity (Unaudited) for the three and six months ended December 31, 2021 and 2020 and (v) the Notes to Condensed Consolidated Financial Statements (Unaudited). * |
__________________________
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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KOSS CORPORATION |
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/s/ Michael J. Koss |
| February 4, 2022 |
Michael J. Koss |
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Chairman |
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Chief Executive Officer |
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/s/ David D. Smith |
| February 4, 2022 |
David D. Smith |
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Chief Financial Officer |
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Principal Accounting Officer |
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